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2024/06

Patterns are the Mothers of Trends: What to do when patterns are unclear?

Patterns, in essence, are the processes of the bulls and bears vying repeatedly within a specific range. Before this process concludes, the battle between bulls and bears remains undecided, but as the end approaches, the result becomes increasingly apparent. Once the winner is determined, the trend unfolds.

From this, we can draw the following conclusions:

1、Patterns precede trends: There is no trend without a pattern. Every trader should understand that there is no such thing as a perpetual one-sided trend. Therefore, observing the market with this mindset is crucial to judging market opportunities accurately.

2、Significant patterns are hard to form and break: Bulls and bears invest heavily, neither side quickly concedes, leading to prolonged battles in the market and making breakthroughs difficult. However, once a breakthrough occurs, its value is significant.

3、Breakthroughs indicate victory: A trend breakout signifies one side’s victory and the other’s defeat. This means a trend will follow the pattern. The magnitude of the ensuing trend is often proportional to the size of the preceding pattern: large patterns lead to significant trends, small patterns to small trends, and medium patterns to medium trends. Once a trend begins, it is only quickly stopped once the energy is fully expended, a new pattern forms, and the old trend ceases.

4、Patterns are the prerequisites for trends: Therefore, solutions in trading should be based on patterns. Before a trend forms and unfolds, the trend’s direction, magnitude, and strength can be anticipated from the pattern. Hence, after a pattern breaks, there is no need to re-evaluate the trend’s direction, size, and strength.

5、Trends progress rapidly after breakouts: Only rapid progress with a breakout exists. With rapid progress, the outcome is uncertain, holding positions is uncomfortable, and adding positions needs more confidence and basis. When rapid progress occurs, and prices move significantly away from the pattern, chasing the market can lead to passive positions during pullbacks. Ultimately, even with patterns and trends, profits may still need to be realized.

Impact of Patterns on Trader Psychology

Patterns significantly influence traders’ psychology both within and during the ensuing trend. Overcoming these psychological barriers is essential for becoming a successful pattern and trend trader.

Post-Breakout Trading Strategy

After a pattern breakout, the only correct approach is holding positions until the stop-loss level is hit. Opportunities are created through patience, and profits are realized by holding positions. If confident in the trend, frequent trading is unnecessary. Confidence and trading strategy should be determined before the pattern breakout.

What to Do When Patterns Are Not Clear?

There is no such thing as a perpetual one-sided trend. Single-day reversals without head or bottom patterns only occur under highly imbalanced conditions.

Even in single-day reversals, there may be no head or bottom patterns, but it does not mean there are no continuation patterns. Single-day reversals without any continuation patterns are rare.

If single-day reversals or reversal patterns do not exist, traders should continue to follow the existing trend, holding positions until the trend accelerates. No pattern is unbreakable; it’s only a matter of time.

However, understanding the relationship and rules between patterns and trends does not eliminate the challenges and interferences in using them for profit, primarily reflected in the following:

1、Small range swings within patterns: Narrow profit margins can profoundly affect profit expectations and holding psychology, including during the trend’s unfolding after the pattern breaks.

2、Contradictory market news: In bottom pattern areas, there is often a flood of negative news, while in top areas, there is a flood of positive news. This can significantly impact confidence in the pattern and subsequent trends, including holding confidence.

3、Initial trend stages are often challenging: Holding positions are constantly tested to some extent during the initial stages of a trend’s progression.

4、Challenging to identify patterns: Some patterns, like double bottoms, are often confirmed only in hindsight and cannot be fully identified beforehand.

Additionally, traders may encounter situations where patterns before and after breakouts conflict with specific technical indicators or analysis methods, contradict authoritative judgments, or where the magnitude of price movements during pattern breakouts is already substantial. These are all unavoidable factors that complicate pattern trading.

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