We are often asked the question here at Price Action Trading System: Is price action trading the same as chart pattern trading? While we as price action traders are interested in seeing certain set ups on our chart before entering, it is much more complex and much different than looking for wedge patterns, head and shoulder patterns or any of the other common chart patterns that we hear so much about in technical analysis. I will go so far as to say that we never look for the typical chart patterns that have become so popular with traders. In fact, now that have come to really understand prices and why they do the things that they do on a chart, we believe that most of these common chart patterns are more apt to fail than succeed. Think about it for a moment: Technical chart patterns are so well known universally to traders that if they truly worked, everyone would be making money as traders, and this is simply not the case.
Many people will tell you that the market is completely random, so there is no way that you can predict with any certainty what it will do next. As a long term price action day trader, I would disagree and say that the market does indeed have structure, and that it speaks to us if we can only understand the language of the markets. Like trying to learn any non native language, learning to understand the language of a price chart is not not easy, but it is completely possible if you put in the necessary time and effort to do so. While you may never know where prices are going to be trading tomorrow or even the next day with complete certainty, it is possible to have a good understanding of where prices are going to be trading in the next few minutes or hours if you understand how to evaluate and read prices.
While nothing is ever written in stone, the ability to understand prices and to follow the price action does give us an edge, and that is all that is needed to make money as a trader. If you don’t understand how having an edge allows you to make money, then study casino odds, as casinos are experts at making money. Many times these casinos make money with only a very slight edge of 1% or so, and that’s not much really. If casinos were truly gambling with their money, they would not be in business long. The people that frequent casinos are indeed gambling, but if you believe that the casino’s are actually gambling with their money, then you have a lot to learn about casino gambling, and it will likely be an expensive education for you.
Below is an excerpt from an article that appears at www.priceactionlab.com. This article discusses and explains nicely why chart patterns themselves are not really the same thing as price action trading. Here is what that article had to say.
Medieval alchemy aimed, amongst other things, at the transmutation of base metals into gold. Trading based on classical chart patterns, like triangles, head and shoulders, pennants, etc. is a form of modern alchemy because it aims at the transformation of simple geometrical shapes found on price charts into trading signals that generate profits. This fact alone does not imply that chart pattern analysis is useless. This type of analysis has different uses for different people, depending on their level of expertise and even investing power.
Why Chart Pattern Analysis is not a science
When traders study chart patterns they are never sure of the final outcome. Specifically it cannot be known in advance whether a chart pattern is a continuation or a reversal pattern. This can only be known on hindsight. Furthermore, the phenomena observed, i.e. the geometric formations on charts due to price action and subsequent prices moves, are not reproducible in a laboratory and thus the outcomes cannot be verified.
These facts contribute to the main reasons for chart analysis being more of a “modern alchemy” than science. In the macrocosm, there are laws that are confirmed experimentally and given the same initial conditions, the same phenomenon emerges with very high probability, almost certainty. For example, the law that objects fall to the ground with acceleration independent of their mass, the principle of Universal Gravitation, has been confirmed with accuracy of one part in a trillion in recent experiments. With chart patterns, given the same principle and initial conditions, different phenomena may emerge, for example an uptrend, a downtrend, sideways action or any combination thereof. This implies that any efforts to turn chart pattern analysis, or essentially the application of naive geometry to the study of price action, into a tool for profiting resemble those old attempts of turning chemistry into a tool of wealth by converting cheap metals into gold, known as alchemy. This is one reason we cannot also talk about rigid principles of technical analysis or founding principles. There are probably as many principles as presumed or self-proclaimed founders. You can read the entire original article here.
We agree with the line of thinking that trading mere chart patterns alone is a losing strategy. There is so much more to know and understand about prices that trading patterns alone is not going to even remotely get you to profitability as a trader. Have you ever wondered why prices can be extremely bearish, yet suddenly reverse on a dime and be quickly climbing to new highs? Often you see just the reverse, with prices racing higher bar after bar, only to suddenly lose momentum and take back the entire move plus more in half the time. If you truly understand prices, and why they do what they do, then you will no longer be perplexed when these things happen. In fact, you will often know where and when to expect these things to occur well in advance. As we stated earlier, nothing is ever certain with prices all the time, but if you learn our price action trading rules and strategies, you will be armed with solid fundamentals and information on “prices,” and that will help you to have a better understanding of why prices do what they do.
Don’t leave your trading results to chance, and don’t believe that chart patterns alone can make you money as a trader. Doing so only makes you a gambler in the markets, and we do not want to be gamblers, because gamblers lose money in the long run. Now that you have some additional understanding of prices, what do you think: Is price action trading the same a chart pattern trading? If you are ready to put the odds on your side and learn how to trade price action like a professional trader, then you can find out more at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.