The idea of automating trading or at least marking a chart looks very tempting. Just imagine – you don’t need to do anything except add the indicator to the chart and make deals. In theory, the scheme looks perfect, but when moving to its practical implementation, many obstacles arise that strongly affect the result. Today we will figure out whether such an approach to trade has a right to exist.
I divide all indicators of this type into 2 groups:
- internal – they are intended for installation in a trading terminal;
- external – separate services that issue signals for the formation of patterns on selected instruments. A striking representative of this category is the Autochartist service. Not only does it automatically mark up the chart, collects statistics on completed patterns, but also knows how to broadcast information directly to MetaTrader 4.0. True, not all brokers offer this opportunity to their clients.
A more detailed classification can also be made, for example, by the types of patterns that the indicator can work with. There are tools for working with harmonic, candlestick, or conventional graphic designs. I will run a little ahead – today the PricePatterns indicator will be in the spotlight, this tool is able to identify the most common graphic constructions on the chart. The picture is ambiguous, it is better to understand in practice what are the benefits and dangers of pattern indicators.
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Exploring the work of the pattern indicator
The most common mistake traders make is that they immediately use the indicator to trade. They add it to the chart, see an almost perfect markup, and immediately start trading. The danger is that indicators can retroactively improve the markup. They either delete unfulfilled patterns, or put the worked out patterns on the chart after they have been worked out.
This creates high expectations. After studying the history, it seems to the trader that almost 80-90% of the patterns are being worked out, but in reality the win rate does not even reach 50%. To avoid this, it is enough to check the indicator’s operation in the tester. By itself, the redrawing phenomenon does not mean that the indicator will merge. You need to check the effectiveness of working out patterns on each timeframe. As for the PricePatterns indicator, it does not work perfectly. There are questions for a number of patterns – the relationships between their individual elements are not observed. Some of the PricePatterns patterns were not selected at all on the chart.
How to use the pattern indicator in trading
If you rely only on the PricePatterns readings, then about 60-65% of the patterns work out on H4. But this does not mean that the indicator replaces a trading strategy.
You can work for a while if you add input filters to the patterns. For example, trade after pattern confirmation. For the Head and Shoulders pattern, such confirmation can be the fixing of the chart behind the broken neck line, for a wedge – retesting its line after the breakout. The same filtering method applies to other graphical constructs as well. But this style of work is doomed to failure. Patterns do not always provide an entry point; after a breakout, for example, the neckline, the price can immediately move towards the breakout, without retesting. Moreover, a trader does not have a systematic approach to market analysis. His trading resembles chaos, the trader completely depends on what the indicator shows.
Newbies are most often interested in such indicators, initially building their trading on a weak foundation. The correct approach looks different:
- first we learn to trade on our own. For example, we use the 3-screen method to analyze higher timeframes, and look for an entry point on a lower time interval;
- then, as one of the entry point filters, we try to introduce the pattern indicator. It could be PricePatterns or another tool.