One strategy promoted by some self-proclaimed 'educators', 'gurus' and some retail brokers is that of trading chart patterns. It suggests, roughly, that the historical movement of a tradable instrument's price over time can form distinctive patterns such as triangles, wedges, channels, head-and-shoulders, Japanese candlesticks and suchlike. It adds, roughly, that traders can identify these patterns to anticipate the future direction of a tradable instrument's price and thus select entry and exit points. Investopedia expresses the strategy more eloquently.
I simply respond with the word "pareidolia".
Merriam-webster.com defines the word thus:
"the tendency to perceive a specific, often meaningful image in a random or ambiguous visual pattern. The scientific explanation for some people is pareidolia, or the human ability to see shapes or make pictures out of randomness. Think of the Rorschach inkblot test."
Understanding this word explodes ONE of the greatest schemes to transfer wealth from the unsuspecting retail trader to market veterans.
Retail traders who trade chart patterns are fleeced twice: Once by having to buy books, courses, videos, to decipher the obscure language and Alice-In-Wonderland logic of chart patterns. And, second, when they attempt to implement the 'information' that they have 'learned' when they start placing trades with a retail broker. The price-time chart becomes an indispensable tool for this strategy: without it, one can't see the alleged potential gold-mines that these patterns reveal.
Unfortunately, the outcomes for many retail traders involve minimal profits, occasional wins, frequent losses, and a repetitive cycle of disappointment. Such results, however, hugely benefit other market participants: The occasional profitable trade lures retail traders to continue playing, generating profits for brokers. When the retail trader is losing, there is likely a market veteran and bigger player on the trade's other side profiting.
Usually the retail trader's losses will outweigh their winnings. Their 'educators' or 'gurus' pushing pattern based trading, will likely retort "try harder", "study harder", "its operator error", "you might see a tradable pattern there, but I couldn't - your fault!" They effectively shame the implementer of their strategy as being too amateur. Their message is also "persist, persist, persist!"
Eventually, the retail trader will incur substantial loses, perhaps to the point of blowing up their account. That is when the wake-up call comes for some. However, others will buy more courses and books telling them similar things with seemingly greater sophistication, set up another trading account, and persist with the same bankrupting strategy.
The important lesson is WHY the strategy does not work - and never could work. 'Seeing' patterns and shapes in phenomena such as clouds does not wholly explain WHY it rains.
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Similarly, 'seeing' patterns and other nuances in snow does not explain THE FUNDAMENTAL CAUSES OF snow, even when Eskimos apparently have over forty different words describing types of snow.
Likewise 'seeing' patterns and 'shapes' in charts tracking the price of a product across time does not explain WHY it was bought or sold. Furthermore, developing a whole new language to describe the types of shape in these price-time charts will not identify the fundamental cause of price movements. There is nothing meaningful to be derived from any perceived pattern on a price-time chart, however much psychological propensity human beings might have to attach it to such patterns.
What does explain price movements? What gives the movement of price across time meaning? Buyers and sellers who participate in that market (and in related markets). Some of those who do this and are much larger in number and account size compared to their retail counterparts include: commercial traders and hedgers, prop or momentum type traders, local participants and market makers. Investigating why and when these participants buy and sell would be a far better initiation for a new retail trader. Price-time charts can be used to aid comprehension of the activities of these participants but, unlike the pattern-based trading 'strategy', are dispensable.
One has to be sceptical about any 'guru', 'educator' or retail broker promoting (or even seriously discussing) pattern-based trading in 2023. It might be worth investigating what publishing and media companies started to promote the strategy in the first place, and which ones still persist. If it is so good, why won't its proponents show its allegedly profitable results? Why don't they encourage any individual to set up a demonstration trading account in order to test the strategy (for free)? Could it be that the strategy is not really the gold-mine it is sometimes sold as being? It is especially ironic that these pattern-based trading strategies are claimed to be part of a family of strategies known as "technical analysis" or "technical trading"!
