The deception nature of technical analysis is a subject very rarely being talked about. At time it feels like a grand scale conspiracy, perpetrated on us traders for more than a century now, ever since the establishment of the Dow theory, somewhere in early 1900’s.
We always keep reminding our members, followers, and fellow traders to be careful and highly suspicious of the common practices that the technical analysis body of knowledge has to offer. Every single one of us in the Bulletproof Traders team have experienced great deal of disappointment using some of these popular tools early on in our trading careers.
As a matter of fact, a couple of years ago we decided to test some of these basic patterns to try and figure out if they even have the slightest statistical edge, meaning whether price pattern trading can produce a success rate higher than 50%. We studied 10 different patterns independently from one another in 5 different markets (Forex, Futures, Equities, Crypto and Bonds), for a time period of 22 months with more than 50 case studies for each and every single pattern.
The results were rather shocking. Even though we suspected that we might not have the best-looking results (We drew that conclusion from the state of our trading performance, which back at the time, was dependent on these patterns), nothing could prepare us for this overly negative statistical picture.
Not even a single pattern had a success rate higher than 50%. In-fact, some patterns presented numbers lower than 40%, and only one pattern was somewhat close to the 50% mark with a success rate score of 48.6%. Very grim picture for price pattern trading, to say the least.
Here is the list of patterns that were involved in the study along with their respective success rates, as they were revealed in the two-year study:
- Ascending/Descending triangles – 39.5%
2. Double Top/Bottom Pattern – 41.2%
3. Head & Shoulders Pattern – 48.6%
4. Trend lines – 37.0%
5. Engulfing Candlestick – 42.7%6. Bullish/Bearish Flags – 44.4%
7. Morning/Evening Star Candlestick – 45.9%
8. Ascending/Descending Wedges – 38.2%
9. Exhaustion Gap – 42.6%
10. Hammer Candlestick – 45.5%
The obvious conclusion was right there staring at our faces. Never should we ever rely on any one of these common patterns in our day to day trading activities. On their own merit, these patterns are simply not reliable enough and have no statistical edge. No wonder why so many traders fail over time, using these common practices, which are readily available to everyone on-line and in countless publications.
However, this statistical picture can be massively improved, beyond recognition. The principle is very simple. Do not use any of these basic patterns as a stand-alone trading technique. Instead, you should marry these patterns with a solid-strong support & resistance system. In other words, if you couple any of these patterns with a reliable support or resistance key level, the statistical data flips on its head upside down.
There are many Support & Resistance systems out there. The trick here is to find a reliable one. We can mention Fibonacci Retracement, Gan lines, Wolf Wave, Point & Figure and Pivot Point system just to name a few. On a personal level, we use our own proprietary Support & Resistance system, the Cross-price Matrix, which is far more robust and reliable than the others mentioned here.
Six months ago, we went back to the study. We wanted to re-test the same common patterns, only this time, coupled with our Cross-price Matrix support & resistance key-levels. Even though the study is still undergoing, we can already present the new findings, as we still collect them every single day. Here are the statistical results for the same group of patterns, as they were tested against the Cross-price Matrix system.
- Ascending/Descending triangles – 59.1%
2. Double Top/Bottom Pattern – 63.8%
3. Head & Shoulders Pattern – 84.1%
4. Trend lines – 67.5%
5. Engulfing Candlestick – 72.0%
6. Bullish/Bearish Flags – 74.2%
7. Morning/Evening Star Candlestick – 65.9%
8. Ascending/Descending Wedges – 58.6%
9. Exhaustion Gap – 82.9%
10. Hammer Candlestick – 81.3%
As a matter of fact, we have come to realize a much deeper and universal truth, if it’s common knowledge it’s bound to fail… Just think about it. When the same information is equally available and accessible to every single trader and investor out there, there can be no real advantage to anyone of them. Moreover, if everyone is using the same “profitable” tools and techniques, then surely everyone should be on the winning side of the scale. But as we all know very well, that is not even remotely the case. It is simply not how markets work.
So, we find it extremely hard to believe that anyone could survive the hardship of trading (let alone be successful) over the long term, just by applying traditional technical analysis principles. In fact, one of our main objectives in writing this article is to provide basic guidance and hopefully save our readers a few years of time wasting, frustration and disappointment. In most cases this would be more than enough to shatter the spirit of any novice trader.