Chart patterns are very popular among technical traders; they are key to market analysis based on technical factors.
Why is it that the same graphic yields different support and resistance trend lines drawn by everyone, and everyone seems to think they have mastered the trading bible, like a vendor boasting about their melons? Little do they know that danger lurks in the shadows—the risk of overfitting exacerbates our biases instead of building patterns objectively.
Overfitting refers to traders drawing patterns arbitrarily without any objective rules, hoping to support biases or conclusions formed through other means.
As shown, the same image trend can draw 8 or even more trend lines. Some patterns here are considered bullish, while others are considered bearish. If you further convert the chart scale from linear to logarithmic, you will see a different set of patterns or more patterns than those displayed at the same price.
Traders cannot distinguish between correct and incorrect patterns. When we refer to correct and incorrect patterns, they are unrelated to trading outcomes. Even trades based on correct patterns can fail. Here, we only discuss patterns that are essentially objective and do not rely on the subjective biases of the analyst.
True failure patterns are inconsistently and unstably drawn over a period, leading to inconsistent analysis. Traders cannot formulate reliable strategies based on this because they do not know if trades fail due to incorrect pattern drawing.
Okay, the previous part was all nonsense; this is the main text 😂
The only way to overcome the risk of biased drawing is to define clear and objective rules. Typically, zigzag indicators are used for algorithmic recognition of patterns on charts. A set of such rules is described below.
Draw a zigzag on the chart
Find and draw a trend line connecting 2 or more pivot low points, where the price has not yet broken below the downtrend line.
Find and draw a trend line connecting 2 or more pivot high points, where the price has not yet broken above the uptrend line.
When drawing trend lines, the trend line can touch pivot candles at any point. However, the candles should not be outside the trend line.
Consider false moves to make adjustments.
At least one of the trend lines mentioned above should connect 3 or more pivot points. The other can connect only two pivot points.
After following these steps, do you see a clear pattern? If so, then you have found your own pattern and have mastered the skill of defining them objectively and without bias.
