Learn to Reduce False Breakouts
by, Raghee Horner
The number one challenge all traders face seems to be the most difficult one to solve – how to eliminate false breakouts and whipsaws. This challenge is not one that chart pattern traders face alone – it is a problem that all traders face. However, chart pattern traders are uniquely positioned to fix the problem most effectively. There is no way to eliminate false breakouts or whipsaws completely. We can only seek to reduce them with proper analysis.
There are three methods by which false breakouts and whipsaws can be reduced. The first step is to consistently identify the patterns. The Autochartist platform takes care of that. By having a tool automating the chart pattern identification for you, you are eliminating much of the “subjectiveness” that charting analysis can lead to. Autochartist is objective as there are no emotions associated with the identification. The chart pattern either meets Autochartist’s criteria or it doesn’t. In the example below the triangle pattern met the criteria and triggered a trade with the breakdown through the uptrend support line. Autochartist then highlights the price projection with the grey shaded area.
The second step is to utilize the “Initial Trend” column reading. The current trend preceding the pattern is a vital component of any trade set up. It helps distinguish continuation patterns from congestion patterns, and it allows us to measure the strength of the markets and identify the current cycle.
Using this reading most effectively is key to determining not only the quality of the pattern but determining whether it is a set up that you may or may not want to trade. Of course “Initial Trend” is not the only Autochartist column heading, but it is the one most directly related to market stages.
The indicator here is indicating a high Initial Trend reading as you can see by the number of green colored bars next to the heading.
For a Symmetrical Triangle the ideal set up would develop in a sideways market and the Uniformity of the pattern would be good. The pattern could break in either direction therefore a good congestion should be evident.
A Triangle is a “congestion” pattern with a typically higher degree of volatility. Patterns like Rectangles are consolidation patterns as the volatility is low. If the Rectangle is part of a Double or Triple Top or Bottom, the volatility can be higher depending on the distance between the support and resistance of the current market.
For further information on this and other Autochartist products please visit our website at www.autochartist.com
