The Connectedness of Chart Patterns

How real are chart patterns? Look at the triangle illusion below.  The mind draws lines to connect the solid circles and perceives a triangle.

Triangle Illusion

Figure 1. Triangle Illusion

We see such lines everywhere.  Evolution has sculpted us to see these lines.  They connect up the world, making sense of fragments in our visual field.    This is a useful trick to reveal predators in the bushes and probably kept our ancestors alive.

With price charts, the eye is drawn to perceive a line when 3 or more obvious turning points are in line.   This forms the basis of many chart patterns (Since any 2 points form a line, we can dismiss those).

Chart Trend

Figure 2. Chart Trend

While chart patterns are often imbued with meaning, it should be recognized that a small change in the position of a turning point can convert one pattern into another, often with different meanings.

Figure 2 below shows the connection between 6 classic chart patterns.  No pattern is more than 3 changes in turning point position away from any other, and this includes the somewhat stylized head & shoulders pattern whose neckline may already slope in the required direction for a wedge or descending channel.

chart relations

Figure 3. Chart Patterns Relations

Next time you look at a chart pattern, ask yourself would you change your mind about it if one of the points defining the pattern was in a slightly different position.

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This entry was posted in analysis, charts, pattern, price, technical, Uncategorized. Bookmark the permalink.

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