Forex Charts Patterns – Do They Increase Your Edge?
Forex chart patterns (increase your edge) Every one trading forex chart patterns knows that they have the potential to increase your edge. Every different chart pattern including triangles, bull and bear flags, Gartley patterns or any other common pattern, all have a certain percentage of successful trade setups. Depending on your money management even a pattern that has a mere 50-50 outcome (most have better ratios) can still keep you in consistent profits, and I’m not going to argue that fact.
Just the other day I got into an argument with a good friend of mine when I told him that chart patterns are fake. I probably used the wrong words in our discussion because he got pretty angry. He took it as though I was telling him that the method he uses to trade is wrong and that wasn’t my intention. I was merely pointing out that the chart patterns we see on the charts are not true patterns. Even though they repeat and have a certain percentage of likely outcome over time, the percentage of successful setups changes over time.
Consider this, in order for any pattern on a chart to be true you would need the same traders, thinking the same thing, taking the same trades, with the same fundamental outlook, that created the first pattern, and all this would need to happen at the same time with the same amount of money used on each trade. This is literally impossible. So he tells me “well the charts are dynamic” and I said “exactly”! What I can tell you with certainty is that those chart patterns follow thru in the direction that Smart Money wants them to, and not because there is any consistency to any certain outcome of the pattern. Now that begs the question of what has happened when the pattern does not do what it should do?
The short answer is you have been manipulated by the smart money to believe that the pattern will have a certain outcome when the whole time they have been accumulating a position against the most likely outcome of that particular pattern. Remember for every buyer there is a seller and for every seller there is a buyer. Therefore Smart Money knows that if for example they create what visually looks like an upward triangle on the chart, retail forex traders will begin to buy. As retail traders begin to buy smart money is the one selling it to them. Those traders are trapped in a long position and served the purpose of buying smart money’s desired short position.
We all know that trading is essentially gambling. We are taking a bet that price will move our direction, and it’s as simple as that. What separates the trading environment from the casino environment is our edge as traders. When we use our edge we are actually placing our self in the casinos position rather than the gambler that pulls the slot handle. The slot machine is designed to suck you in to believing you can win even though the odds are extremely against you. This is exactly what Smart Money does with these so called predictable patterns. Giving you small wins over time creates the thought process that you are using a winning strategy, and the next big hit is only one trade away!
They also use the moving averages and any other standard indicator commonly used by retail traders. The fact is they know how traders use them and can move price enough to make the pattern break or MAs cross just to suck us into the market. It is absolutely essential that Smart Money does this as they literally have to create buyers if they would like to sell the market, and they must create sellers if they are looking to buy the market. The shorter the time frame the easier it is for them to trap traders. This is our personal belief and we ask you to do some serious thinking on this matter, as it could mean your ultimate success or failure in the forex market.
The Smart Money
When referring to the Smart Money we are essentially talking about the worlds ten largest banks. They are (in order) BNB Parabas, Royal bank of Scotland, Barclays, Deutsche Bank, HSBC Bank, Credit Agricole, Bank of America, Mitsubishi UFJ, JP Morgan Chase, and UBS AG. They also include Investment banks such as Goldman Sachs and the like. Even your typical large bucket shop broker that is not a registered ECN such as FXCM fits the bill. The reason we call these guys the Smart Money is the fact that they have access to information we as retail traders will never have.
I have recently read many articles detailing how these guys get insider information from sources within our own governments. To think that they wouldn’t manipulate the intraday market is naive at best. Here is a great video where well known trader Jim Cramer blew the whistle when he admitted to manipulating stock prices during his days as a hedge fund manager, and went on to say not only how easy it was, but also that everyone is doing it. Again it would be naive to think that it is different for the currency market. Why would it be? If you had access to order flow and inside information from government sources to trade from would you? Of course you would! I know I would!
The points and facts in this article are just some of the ways they manipulate free markets. It would take a book to describe them all. Below however is a nice example. This is a chart of Non-Farm Payroll from December 2nd, 2011. First notice the ascending that at first
broke thru the pattern as expected before the release. It then tests the breakout level and rises during London session not only taking out stops but sucking in new buyers as the pattern has worked and traders buy. This was a manipulation by the London market as they accumulated sell orders. A couple hours later the NFP numbers came out and was lower than expected, but the unemployment rate was much better than expected as you can see on the chart. It doesn’t take much for math skills to figure that a fall in the unemployment rate couldn’t be caused by a lower number of jobs added in a month. Even I knew that the drop in unemployment was due to people either running to the end of their unemployment benefits or giving up on looking for work entirely (the Smart Money knows this better than I do) yet you can see how price spiked up to take out stops above the highs before the drop. Who do you think did that?
These are 2 classic examples of how the Smart money uses patterns and news to manipulate traders into bad positions in order them to be able to enter their desired position. Again, and at the risk of sounding like a broken record there has to be someone willing to buy if you are looking to sell, and someone looking to sell if you are looking to buy. This is a problem for Smart Money given the size of the positions they enter, and it is ABSOLUTELY necessary for them to manipulate the market into the opposite of their intended direction. We must use this information if we are to avoid being part of the losing heard of retail traders.
Increase your edge
Now I am sure you are wondering how then do you increase your edge? The short answer is instead of trading a manipulated pattern trade with the Smart Money. There are certain things the Smart money does to “show their hand” so to speak. For Example:
Market intent – A substantial increase in volume, with the bar opening on its high and closing on its low, or opening on its low and closing on its high.
Faded moves – A lower volume move often against the trend showing little or no interest in the direction of the reversal. This can also be a series of lower volume bars that slowly move against the trend.
Sudden shifts A shift in direction opposite the short term direction of the last several bars. This often comes after a faded move. Example: Assume the trend is down and you then have 3 low volume candles up followed by the next candle aggressively jumping down. This is a sudden shift from a market moving slowly up to aggressively down.
Stop runs – A pop above or below a short term high or low that gets rejected usually forming a large wick on the bar. This is usually the clearest way to identify what Smart Money is doing, and the position they are accumulating. Those new to tracking Smart Money should at first stick with stop runs as they are the easiest to identify. What we are determining using these is how they are manipulating the market. Eventually the Smart Money has to create the move in the direction they will profit from and these are the ways they show it to us before the trend actually begins.
Before you conclude that I am speaking about another pattern let me tell you that there is no consistent pattern to follow here and that is NOT what we are looking for. We only need to see a few of these tell tale signs of what they are doing. Smart Money is very secretive in what position they are accumulating but they can’t hide it forever. Imagine if Smart Money was like a terrible poker player that had a sure “tell” that gave away what they were accumulating every time. If this was the case we would all begin to pile on before they finished accumulating their desired position! This would essentially ruin the way they trade, and therefore this is why they do everything they can to disguise what position they are entering.
What I do is look for the tell tale signs and only trade when I’m certain of the direction the Smart Money has been accumulating. Are we right 100% of the time? No, but when I see the chart patterns I can use the Forex Bank Trading Strategy and increase my edge once the manipulation becomes clear.