Here are some of our trading secrets. We always keep reminding our members, followers and fellow traders to be carful and highly suspicious of the common practices that the technical analysis body of knowledge has to offer. Every single one of us in the Bulletproof Traders team have experienced great deal of disappointment using some of these popular tools early on in our trading careers.
As a matter of fact, a couple of years ago we decided to test some of these basic patterns to try and figure out if they even have the slightest statistical edge, meaning whether price pattern trading can produce a success rate higher than 50%. We studied 10 different patterns independently from one another in 5 different markets (Forex, Futures, Equities, Crypto and Bonds), for a time period of 22 months with more than 50 case studies for each and every single pattern.
The results were rather shocking. Even though we suspected that we might not have the best-looking results (We drew that conclusion from the state of our trading performance, which back at the time, was dependent on these patterns), nothing could prepare us for this overly negative statistical picture.
Not even a single pattern had a success rate higher than 50%. In-fact, some patterns presented numbers lower than 40%, and only one pattern was somewhat close to the 50% mark with a success rate score of 48.6%. Very grim picture for price pattern trading, to say the least.
Here is the list of patterns that were involved in the study along with their respective success rates, as they were revealed in the two-year study:
1. Ascending/Descending triangles – 39.5%
2. Double Top/Bottom Pattern – 41.2%
3. Head & Shoulders Pattern – 48.6%
4. Trend lines – 37.0%
5. Engulfing Candlestick – 42.7%
6. Bullish/Bearish Flags – 44.4%
7. Morning/Evening Star Candlestick – 45.9%
8. Ascending/Descending Wedges – 38.2%
9. Exhaustion Gap – 42.6%
10. Hammer Candlestick – 45.5%
The obvious conclusion was right there staring at our faces. Never should we ever rely on any one of these common patterns in our day to day trading activities. On their own merit, these patterns are simply not reliable enough and have no statistical edge. No wonder why so many traders fail over time, using these common practices, which are readily available to everyone on-line and in countless publications.
However, this statistical picture can be massively improved beyond recognition. The principle is very simple. Do not use any of these basic patterns as a stand-alone trading technique. Instead, you should marry these patterns with a solid-strong support & resistance system. In other words, if you couple any of these patterns with a reliable support or resistance key level, the statistical data flips on its head upside down.
There are many Support & Resistance systems out there. The trick here is to find a reliable one. We can mention Fibonacci Retracement, Gan lines, Wolf Wave, Point & Figure and Pivot Point system just to name a few. On a personal level, we use our own proprietary Support & Resistance system, the Cross-price Matrix, which is far more robust and reliable than the others mentioned here.
Six months ago, we went back to the study. We wanted to re-test the same common patterns, only this time, coupled with our Cross-price Matrix support & resistance key-levels. Even though the study is still undergoing, we can already present the new findings, as we still collect them every single day. Here are the statistical results for the same group of patterns, as they were tested against the Cross-price Matrix system.
1. Ascending/Descending triangles – 59.1%
2. Double Top/Bottom Pattern – 63.8%
3. Head & Shoulders Pattern – 84.1%
4. Trend lines – 67.5%
5. Engulfing Candlestick – 72.0%
6. Bullish/Bearish Flags – 74.2%
7. Morning/Evening Star Candlestick – 65.9%
8. Ascending/Descending Wedges – 58.6%
9. Exhaustion Gap – 82.9%
10. Hammer Candlestick – 81.3%