The combination of price/action patterns boosts the efficiency of trading systems. Every day is a lesson. I’ve been improving my skills of applying Expanding Wedge for a long time, but it has never entered my head to combine it with other graphic patterns.
Only after having read about the Diamond Bottom/Top pattern in Thomas Bulkowski’s best-selling Encyclopedia of Chart Patterns, I find what was missing in my trading system. From time to time, I had difficulties in identifying entry points. Fibonacci levels were quite efficient, but they sometimes seemed not to work to the full.
After a few years of using the Expanding wedge pattern, I stopped doubting its efficiency. It was like clockwork. Its occurrence in the chart fitted perfectly the concept of a fight for initiative between bulls and bears, which finally led to consolidation. I only had to use coyote tactics: wait for the winners and side with them. To reach this objective, I implemented Fibonacci correction levels drawn on the chart within waves 4-5.
The problem was that quotes could rise above 38.2%, 50%, or even 61.8%. What’s more, I realized later that Expanding wedge isn’t necessarily a reversal pattern. Growth of a currency pair above 78.6% or 88.6% of wave 4-5 could be the reason for opening long positions. As an option, quotes would return to a previous price level (for example, a pair reached 38.2% and then fell to 23.6%), but such an option would sometimes leave me without profits.
The acquaintance with Diamond chart patterns added a missing detail into my trading system. A convergent triangle appearing after an expanding trend is a serious hint that shows who will celebrate a victory - bulls or bears.
Located above the upper diagonal line, it allows opening long positions; located below the lower diagonal line, it prompts to sell. One doesn’t have to think about quotes’ retracement to a previous target level or whether they will miss profits. Stop-loss orders usually resolve those problems. They should be placed above the peak of a current price accumulation.
compliance with the algorithm decreases stress and raises self-confidence. True, not all the trades are profitable, but if you believe in a pattern and in a trading system based on it, you will easily free yourself from many hang-ups peculiar to traders.
However, don’t forget that we never stop learning. Markets are changing, and trading efficiency is changing too. That’s why some robots which look attractive based on history don’t work efficiently as often as we would want them to.
The acquaintance with the Diamond Bottom/Top pattern made me wonder: is the combination of an expanding wedge and convergent triangle really the most efficient? Does it probably make sense to consider the combination of the former with the pattern Splash and Shelf ? What do you think? Continue reading with Litefinance.com...