Why do Patterns fail so often?
To answer this question, let's try to take a classic Pattern as an example: the "Head and Shoulders".
Typically Traders take short position (in this example) on neckline breakout and place stop loss above right shoulder or head.
If we only take these elements into consideration, it often happens that pattern fails.
Why does this happen? Because these elements are not enough and we need to use some "filter".
One of these filters, and perhaps the most important, is the "placement".
For example, the Head and Shoulders is considered a Reversal Pattern that should only appear at the end of a Trend, and this is where the "Elliott Waves" come into play. In fact Elliott claims that a Trend is formed of 5 waves (3 + 2) and often the first signal of the end of the trend is the first bearish leg after wave 5 (Wave A).
Another important filter could be RSI indicator because often some divergence also appears in wave (5).
In conclusion, the Patterns work very well on the market but you also need to learn how to use them correctly, trying to use some filters to get some more confirmation and limit losses as much as possible.
Naturally these considerations are personal and come only from my experience, but they are absolutely subjective and therefore open to criticism.
...I hope I was helpful.
Typically Traders take short position (in this example) on neckline breakout and place stop loss above right shoulder or head.
If we only take these elements into consideration, it often happens that pattern fails.
Why does this happen? Because these elements are not enough and we need to use some "filter".
One of these filters, and perhaps the most important, is the "placement".
For example, the Head and Shoulders is considered a Reversal Pattern that should only appear at the end of a Trend, and this is where the "Elliott Waves" come into play. In fact Elliott claims that a Trend is formed of 5 waves (3 + 2) and often the first signal of the end of the trend is the first bearish leg after wave 5 (Wave A).
Another important filter could be RSI indicator because often some divergence also appears in wave (5).
In conclusion, the Patterns work very well on the market but you also need to learn how to use them correctly, trying to use some filters to get some more confirmation and limit losses as much as possible.
Naturally these considerations are personal and come only from my experience, but they are absolutely subjective and therefore open to criticism.
...I hope I was helpful.
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