Further explanation on Price Pattern Table for Trading and Investment
Now I got many questions from traders about the Price pattern table for trading and investment posted last time. Here is the link to the last post.
What do the Price Pattern Table really means ? How can you relate them to your trading ? Since I have created the price pattern table, here are some further explanation in plain language. Five regularities are the major price patterns in the financial price series. It is difficult to think of any financial price series without these five regularities really except when the market is purely random. If the market is purely random, then we will not trade the random market anyway. So we can assume cycle always exists as we have shown in our Price Pattern Table. But the questions are how many cycles exists and how to deal with them for our trading ?
We have to think about what tools we are using for our trading and investment. One of them are those traditional technical indicators like moving average, RSI, Bollinger bands, etc. Many of the traditional technical indicators based its working principle on the signal processing and noise filtering topics. For this reason, they assume that price series have the finite number of cycles in it. For example, many technical indicator like moving average, RSI, MACD, CCI, etc operates with the period input as you know. The period input is indeed cyclic operator for many technical indicators.
However, as we have shown in our Price Pattern Table, the financial market could be dominated with fifth regularity which is characterized by the infinite cycle. Surely the financial market is not like chemistry or physics where many substitutes making up the object can be measured in nano or micro levels. In fact, it is far away from nano or micro level due to the human psychological factors but we can only tell them roughly using math or some quantitative techniques. It is possible that we can still get the intuition or logic behind this.
This is not necessarily that traditional technical indicators can not be used for your trading. Depending on what regularities are dominating in the price series, you will find some market can work with traditional technical indicators but some market will not.
However, one thing could be clear from the price pattern table. Using too many of them at the same time will likely to kill the valuable information in the price series. Therefore, it is not the recommended practice to build your trading strategy with technical indicators alone. To give you further idea about the logic, see the screenshot. If the market is dominated more with fifth regularity, the chance for the traditional technical indicator to work is low because technical indicator assumes that market have the finite number of cycles.
For this reason, traditional technical indicators work better when the market have finite or limited number of cycles as in first, second, third and fourth regularities. Hope this clears your questions. At the same time, do not forget that technical indicator and technical analysis are two different things in our discussion. Fortunately trading is not rocket science and I think any one can learn well. Just you need some time to discipline yourself but many skips this phase.
If you are interested in digging deeper with Price Action and Pattern Trading, then you can read the book here: