Why Price patterns work. Price patterns are patterns that were made by price based on the relationship between time and the movement of price on a price chart. They could be based on a single bar or candlestick, two or more, or even several bars or candlesticks. For now, I would be using just bars. They could be just for one session based on the timeframe or several sessions or days. The charts below illustrate some bars
Single bars
Multiple bars
Some of the reasons why price patterns work are:
1. Prices are determined solely by people’s changing attitudes towards the emerging fundamentals. That means, prices are determined by psychology. Garfield Drew is quoted as saying that: “Stocks don’t sell for what they worth, but for what people think they are worth.” One recent example of people’s changing attitude is the recent selloff in gold that was experienced at the heart of the Covid-19 pandemic. People thought gold being a safe haven could rise rapidly in prices, but for two weeks between March 9 and March 19, the price of gold fell by 14%.
2. Market prices are not random events. People’s changing attitudes towards the value of an asset moves in trends and trends tend to perpetuate. An uptrend is expected to keep going up until the market psychology changes and the same for a downtrend. The shifts in these attitudes are usually captured by price patterns. GBPUSD chart below showing how a shift in trend due to market sentiment is captured by the 123 pattern and trendline very perfectly. A huge rally ensued.
Notes on my observations:
1. Price patterns should not be used in isolation. When I trade price pattern I use confluence of the price pattern with support and resistance levels such as horizontal support and resistance, diagonal support and resistance from trendlines, and Fibonacci levels.
2. Also, you should take note of the underlying psychology that gave rise to the development of the price pattern. I generally trade pullbacks and reversal patterns because these give price actions that conform with the underlying psychology of the market in trends.
