The psychology of price patternsWe have said before that changing attitudes determine price and price moves in trends that tend to perpetuate. So, how can a trend be defined?
Simply, it is the movement of price in an irregular but persistent direction. When you zoom out your chart and watch price movement, whatever is obvious is the trend. The USDZAR chart below illustrates some trends you will encounter.
For those that are familiar with watching charts, then we can say price moves in either of 3 ways: upwards, downwards, or sideways. When it is moving upwards or downwards, people say either the buyers are greater than the sellers, or the sellers are greater than the buyers. But thinking this way has errors. They are saying that the market is not in equilibrium. The correct interpretation of such upwards or downwards movement is that the buyers are either more aggressive or enthusiastic than sellers for uptrends, or the sellers are more aggressive or enthusiastic than buyers for downtrends.
For the third case, the sideways movement, we can say that this is a transitional period, a period where the aggression of buyers and sellers are evenly matched. It is at these periods that price patterns develop. This is a period of consolidation between both sides of the market and it is of two types:
a. Consolidation or continuation patterns: this is where the preceding trend before the consolidation is seen continues after the consolidation. That is uptrend to consolidation to uptrend vice versa. The chart below shows an example.
b. Reversal pattern: this is where the opposing trend to the preceding trend before the consolidation is achieved. This pattern separates an uptrend from a downtrend, and a downtrend from an uptrend.
These patterns are the bread and butter of the setups we trade in price action.
These patterns sometimes don’t work in line with the fundamental news such that they might appear unbelievable. That is what makes them powerful. I have seen so many traders who saw a reversal pattern in an asset but who read that the fundamental news says the trend will continue. Because they chose to follow the crowd, rather than listen to price, they placed a trade in line with the fundamental news only to lose money in the process.
This is why in my trading I don’t follow the fundamental news or what the crowd is saying. I listen to the crowd but don’t follow them. I follow price and the patterns that price gives. This is because every news in the market is already factored in the price. Therefore, it is better to follow price.
