Which classical charting patterns are best, and which ones are suspect?

Have you ever noticed that sometimes the clearest and most obvious chart patterns end up morphing and changing into something else?

How do you know which ones are “good” patterns and which ones are crap?

You can never know for sure, but here are some general principles.

Principle: Diagonal Lines Are Bullshit

By definition a diagonal line involves a subjective opinion.

But sometimes our opinions are shit, and we are the only assholes squirting them.

Our brains look back at completed patterns and we can only notice the completed pattern, and not all the morphing micro patterns that failed before it.

Take a look at the current daily chart of gold. Its a pretty clear bullish inverse head and shoulders pattern, right?

Yeah, kinda sorta. And I’m bullish on gold too, but this is only easy in retrospect.

Go back in time a month, and this was an unusually clear bearish triangle pattern with a clean downside break.

Obviously, those diagonal lines are inherently prone to morphing and changing into other patterns.

The most unreliable of all patterns are diagonal trend breaks of any sort, symmetrical triangles, and wedges.

PRINCIPLE: Horizontal lines are better

Horizontal lines are inherently better because we can’t have an argument about them.

Which horizontal lines are best? The ones lasting the longest, which are the most obvious. It makes sense to accumulate positions (both long and short) around the boundaries because the best risk reward opportunities are there.

Take bitcoin for example. For months I’ve been telling you that below this big bad obvious horizontal line bitcoin is going to crash.

And crash it did. Note the increase in downside range which indicates the decline is accelerating. This is not a knife to catch just yet, it could easily fall another 30%.

Principle: If Bearish Patterns Work, its Probably a Bear Market

Take a look at Etherium. See how 6 out of 7 bearish inside day patterns worked?

That’s a pattern with a long term 50/50 win rate, so when it works nearly all the time the market is telling you loud and clear that it wants to go down.

Principle: Longer Formation Time is Better

Look at the pattern in the BTC chart above. If you zoom in, you can see numerous patterns that formed, started working, then morphed werewolf style into something more horrifying.

It seems very clear in retrospect but look at some of the confusing shitfuckery you have to deal with along the way.

To be brutally honest, most of the time classical charting isn’t all it’s cracked up to be. But if you want to engage in it, the times it really works is when the patterns take a long time to form. 10-14 weeks is about right.

You are looking ideally for patterns with clear horizontal boundaries, and clear CLOSES above or below them.

Principle: The CLOSE is what matters

This is important to understand. With longer term patterns intraday moves don’t mean shit. The daily close is what matters. If sellers can push and hold the price below some critical boundary that bulls will have defended, then bulls are weakened by defending it.

If you want to know more about a better way to do technical analysis what I’m going to recommend is learning to read the unfolding story of price, bar by bar.

And the best material ever made is the Price Action Masterclass.

Cheers,

Scott