# Traders' delusion with random patterns



## Starcraftmazter (3 January 2012)

Just thought I'd share this:
http://www.streetcoup.com/2011/12/traders-delusion-with-random-patterns/


I read in the last few days that somewhere around 50-70% of US managed funds underperformed sp500. Wonder if there is a correlation there


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## tech/a (3 January 2012)

*Re: Traders’ delusion with random patterns*



Starcraftmazter said:


> Just thought I'd share this:
> http://www.streetcoup.com/2011/12/traders-delusion-with-random-patterns/
> 
> 
> I read in the last few days that somewhere around 50-70% of US managed funds underperformed sp500. Wonder if there is a correlation there




A statement that's been around for as long as charting has been popular.
I've not seen a study of these "random" patterns.
" The Encyclopedia of Chart Patterns" was very disappointing.
While I have no doubt that in isolation ANY analysis fundamental or technical can be seen of little or no value.
There are patterns which repeat with enough accuracy to enable a trader to anticipate a move profitably.
The restore of most traders to be right rather than profitable ( the two don't always align) you can be right 70 % of the time and still be in loss.
You can also be right 30% of the time and be very profitable.

So I'd like to see some papers on " random" patterns rather than mice feeding habits.


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## suhm (3 January 2012)

*Re: Traders’ delusion with random patterns*

Chart patterns are a reflection of events and people's interactions with one another to form the market and hence are reflective of their underlying situations and belief in the shares so are not random.

Even if this includes chartist using TA, trend following is a popular method and other people will see the same trend thus it will become a self reinforcing trend.

I use charts to help with entry and exit points, not to pick the underlying stock.


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## pixel (3 January 2012)

*Re: Traders’ delusion with random patterns*

Fund managers ignoring charts and probabilities derived therefrom, are at best one-eyed. And they're leading the 50-70% of "investors" that are completely blind.

A fund manager tried to solicit my business by pointing out that they never sold a stock; they merely rebalanced their next round of additional purchases. Sounds good in theory - but will only work if you're consistently getting new funds. Another form of a Pyramid.

Not surprisingly, my mate, who had introduced me to them, lost heaps.


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## notting (3 January 2012)

*Re: Traders’ delusion with random patterns*

Disregarding technical analysis and the value of being wrong more often than not
If your an astute, perceptive and smart person, nearly smarter than everybody you meet, especially when it comes to business and are good at controlling your nerve etc etc.  then you’d think you'd be brilliant at trading!!.  The very fact that you are smarter than the pack and *right* about what you think is really going on will most likely make you a lousy trader!!
Everybody else is thinking something different because they’re wrong and not as smart as you - so the trading is generally going to be going against you who are *right*!
The very fact that your smarter than everyone and can see that the market is just over reacting etc etc you will know what the sensible thing to do is whilst the market is not being sensible!  Yep, you will be sensible and lose against it!


Sometimes the worst thing that can happen is when the market really does align with your thinking and you are hot!  Everything you do just seems to work, that's when you get the one loss that wipes out all your winning!
Reminds me of Charlie Sheen.
I'll think I'll get some cups and T shirts made with 'LOSIING%' written on them!


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## motorway (3 January 2012)

*Re: Traders’ delusion with random patterns*



Starcraftmazter said:


> Just thought I'd share this:
> http://www.streetcoup.com/2011/12/traders-delusion-with-random-patterns/
> 
> 
> I read in the last few days that somewhere around 50-70% of US managed funds underperformed sp500. Wonder if there is a correlation there






> It reminded me a lot of the senseless undertakings that traders do to seek logic in random price action:




Well who can argue with that statement ?
Who would seek logic in Random Price Action ?

Maybe a lot of price action is random !
So do not seek logic in it !

But it only needs a little of the price action to be non random in order for there to be trends and turning points and real support and resistance. 

How much of the daily volume in the share market is random ( from one perspective ) ?


What can look like random movements at one scale can at another be a definitive trend. Many processes in nature are like this. Bacteria or a virus invading your body for instance. It also depends on what and how you measure.


EG the bacteria; invasion of your body will follow a S curve not withstanding that at some level each cell will be invaded randomly.

What matters  is the volume that is not random !



> It reminded me a lot of the senseless undertakings that traders do to seek logic in random price action




Seems a reasonable observation. 

motorway


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## Gringotts Bank (3 January 2012)

*Re: Traders’ delusion with random patterns*



notting said:


> Disregarding technical analysis and the value of being wrong more often than not
> If your an astute, perceptive and smart person, nearly smarter than everybody you meet, especially when it comes to business and are good at controlling your nerve etc etc.  then you’d think you'd be brilliant at trading!!.  The very fact that you are smarter than the pack and *right* about what you think is really going on will most likely make you a lousy trader!!
> Everybody else is thinking something different because they’re wrong and not as smart as you - so the trading is generally going to be going against you who are *right*!
> The very fact that your smarter than everyone and can see that the market is just over reacting etc etc you will know what the sensible thing to do is whilst the market is not being sensible!  Yep, you will be sensible and lose against it!
> ...




I agree.  I try to think instead: "is Joe Average excited about buying this?"  "is Joe Average still excited, or is he getting nervous?".  Sometimes this can be quantified, eg. Joe Average is always interested in stocks that are running up really hard on huge volume.

Alternatively, I use my imagination and do some acting (see: http://en.wikipedia.org/wiki/Method_acting).  If for the next 5 minutes I immerse myself in what it would be like to be Paul Rotter, then would I be buying or selling right now?  If one has the temprament for this approach, it can be remarkably useful.


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## motorway (3 January 2012)

*Re: Traders’ delusion with random patterns*

consider the building of a sand pile

A sand pile is a recognizable thing !

Even though the individual grains can randomly arrive and locate.

So two questions arise . How many grains does it take to make a sand pile  ?

and 

How many does it then take to cause  an avalanche and a collapse of the sand pile once the  sand pile has been built ?

Now markets are two way auctions.
*
Sand Piles in the market. collapse  Up and Down*



Motorway


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## Wysiwyg (3 January 2012)

*Re: Traders’ delusion with random patterns*

Randomness appears when the intentions of the variables (the minds participating) are not known. Are you accumulating in distribution and distributing in accumulation?


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## pixel (3 January 2012)

*Re: Traders’ delusion with random patterns*



Gringotts Bank said:


> I agree.  I try to think instead: "is Joe Average excited about buying this?"  "is Joe Average still excited, or is he getting nervous?".  Sometimes this can be quantified, eg. Joe Average is always interested in stocks that are running up really hard on huge volume.
> 
> Alternatively, I use my imagination and do some acting (see: http://en.wikipedia.org/wiki/Method_acting).  If for the next 5 minutes I immerse myself in what it would be like to be Paul Rotter, then would I be buying or selling right now?  If one has the temprament for this approach, it can be remarkably useful.



 that approach may have worked 10-20 years ago when the market consisted of lots of Joe Averages. Since the introduction of computers, Joe has to a large extent been replaced by R2D2 and his 'bot mates. All they play by are t/a rules. And they very rarely get excited by anything.


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## motorway (3 January 2012)

*Re: Traders’ delusion with random patterns*



Wysiwyg said:


> Randomness appears when the intentions of the variables (the minds participating) are not known. Are you accumulating in distribution and distributing in accumulation?




IF I tell you the sun is crossing the equator !

Could you tell me if it was Summer or Winter approaching ?

You always need know TWO THINGS to have the context.

You need both NOW and BEFORE ( Where in the cycle )

you need to know Position and Trend ( The Technical Position )
You need to know this Dynamically .

Then identify the turning points   

By the change of behavior of PRICE VOLUME & TIME 

By these  Contracting and Expanding 

motorway


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## Wysiwyg (26 August 2015)

*Re: Traders’ delusion with random patterns*



motorway said:


> IF I tell you the sun is crossing the equator !
> 
> Could you tell me if it was Summer or Winter approaching ?
> 
> ...



Dear T/A traders, I am experiencing a run of pattern trades that fail. Trading breakouts from channels and consolidations or buying/shorting support/resistance , the price will reverse the breakout after a brief period. The support or resistance line hits are from a few to many defining a definite channel or pattern structure and the line breaks are what would be considered false retrospectively. 

So the question is why? Are my experiences price manipulation to trip stops lower than support/higher than resistance or a bull/bear trap for traders that trade the breakouts?


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## Wysiwyg (26 August 2015)

*Re: Traders’ delusion with random patterns*

This within the last hour live trading EUR/AUD. Trading hourly I initially bought the support line but the channel broke within minutes ( strange that) so flipped and went short. The result was a reverse back into the channel. They look deliberate to cheat the game!


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## CanOz (27 August 2015)

*Re: Traders’ delusion with random patterns*

I feel your frustration wysiwyg and I've been there. I find the shorter the time frame the more useless the patterns are now. I can't help but see them, but they're not part of my plans and haven't been for a few years. Sometimes I get all warm and fuzzy if there's a pattern that has confluence to my play of the moment. EOD I take more note of them...

To me , it's beyond coincidence that they fail so regularly. Perhaps there are Algos designed just to hunt pattern traders in fx.


Cheers,


CanOz


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## sinner (27 August 2015)

*Re: Traders’ delusion with random patterns*



Wysiwyg said:


> This within the last hour live trading EUR/AUD. Trading hourly I initially bought the support line but the channel broke within minutes ( strange that) so flipped and went short. The result was a reverse back into the channel. They look deliberate to cheat the game!
> 
> View attachment 64041




Notes:
* You're trading EURAUD intraday outside of AUD session time.
* You anticipated the low of a pretty tenuous pattern (IMHO anyway) and it does look like the price rallied off that low, 5 or 10 pips is the most I would expect at the "high probability" end of the spectrum on that kind of line. I would put the expected probability of it bouncing magically off that line and going straight up to the top of the "channel" at less than 25%.
* I would have instead placed a buy stop at 1.6+spread+1 pip if I was looking for channel highs.
* Not sure why you shorted. Pattern failure is not a reverse signal. i.e. there is no guarantee that because a bullish pattern failed that bearish price action will ensue.
* You will note the bar you shorted is basically >4 consecutive down closes. Terrible place to short.
* You say the result was the reverse back into the channel, as if this was a large bull move, but (at least from your screenshot) the high of the bar is lower than the low of the bar you initiated your initial long from.
* Channels and whatnot in general are ways to visually identify consolidations. The trade is consolidation breakout, usually pro continuation. Looking at  the chart, to me the channel your software has drawn is not a consolidation. The real consolidation is on a higher timeframe, visible as multiple highs and lows on your chart between ~1.625 and ~1.585.

Meanwhile, nearly every single inside bar (i.e. consolidation which probably shows up as a channel or whatever on smaller timeframes) on that chart paid out at least 1:1.


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## Trembling Hand (27 August 2015)

Agree with Sinner. They are just poor setups and terrible trades.


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## cynic (27 August 2015)

Although I cannot make specific comment on Wysi's analysis (I am not an active FX trader, and do not use chart analysis) I can say, irrespective of anyone's opinion of another's analysis, that I definitely I do know of OTC derivative providers that have done some highly questionable things with their pricing to the detriment of their clients. Whilst I am unable to prove that such behaviours were deliberate, the frequency and regularity of such occurrences increasingly leads me to believe it to be very much the case.


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## sinner (27 August 2015)

cynic said:


> Although I cannot make specific comment on Wysi's analysis (I am not an active FX trader, and do not use chart analysis) I can say, irrespective of anyone's opinion of another's analysis, that I definitely I do know of OTC derivative providers that have done some highly questionable things with their pricing to the detriment of their clients. Whilst I am unable to prove that such behaviours were deliberate, the frequency and regularity of such occurrences increasingly leads me to believe it to be very much the case.




except Wysis example has nothing to do with that, he traded these prices of his own volition. retail brokers are not watching crappy automated EURAUD channels trying to move the entire EURUSD AUDUSD complex to scalp Wys and the other 5 people using the same software on EURAUD hourlies for 20 pips.


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## cynic (27 August 2015)

sinner said:


> except Wysis example has nothing to do with that, he traded these prices of his own volition. retail brokers are not watching crappy automated EURAUD channels trying to move the entire EURUSD AUDUSD complex to scalp Wys and the other 5 people using the same software on EURAUD hourlies for 20 pips.




Next minute you'll be telling me that my broker didn't get caught filling my orders at inferior prices on some of their index futures CFD instruments!!


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## sinner (27 August 2015)

cynic said:


> Next minute you'll be telling me that my broker didn't get caught filling my orders at inferior prices on some of their index futures CFD instruments!!




No, I'm just telling you it's not relevant here.


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## cynic (27 August 2015)

sinner said:


> No, I'm just telling you it's not relevant here.




Thanks for that. Looking back through earlier posts it seems I may be drifting away from the original theme of this thread. I think I may have mistaken wysiwyg's footnote for part of his post.

Edit: Upon rereading recent posts, it appears that my comments probably do have relevance, given some of the comments that were previously made.


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## cynic (27 August 2015)

I just had a very interesting conversation with a CFD provider about the variance between their pricing and the actual underlying market. I've asked that the explanation be provided in writing as I do not want to make the mistake of misquoting them. At this point I can say that if I understood correctly, their product cannot be expected to reflect the underlying market.


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## Joules MM1 (27 August 2015)

cynic said:


> I just had a very interesting conversation with a CFD provider about the variance between their pricing and the actual underlying market. I've asked that the explanation be provided in writing as I do not want to make the mistake of misquoting them. At this point I can say that if I understood correctly, their product cannot be expected to reflect the underlying market.




should you expect them to say it (input your instrument code here) follows a futures contract ?


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## cynic (27 August 2015)

Joules MM1 said:


> should you expect them to say it (input your instrument code here) follows a futures contract ?




Apparently not. It seems that contracts for difference on an underlying asset aren't !!


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## Joules MM1 (27 August 2015)

cynic said:


> Apparently not. It seems that contracts for difference on an underlying asset aren't !!




ok to publish what youre told, cynic ?

TIA, if yes


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## rnr (27 August 2015)

cynic said:


> I just had a very interesting conversation with a CFD provider about the variance between their pricing and the actual underlying market. I've asked that the explanation be provided in writing as I do not want to make the mistake of misquoting them. At this point I can say that if I understood correctly,* their product cannot be expected to reflect the underlying market*..




Unless, of course, the CFD provider offers DMA trades e.g. SPI ASX200.


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## sinner (27 August 2015)

cynic said:


> I just had a very interesting conversation with a CFD provider about the variance between their pricing and the actual underlying market. I've asked that the explanation be provided in writing as I do not want to make the mistake of misquoting them. At this point I can say that if I understood correctly, their product cannot be expected to reflect the underlying market.




Did you never read the PDS? All CFD providers have clauses which basically allow them to price any asset at their discretion. 

sinner performs due diligence for cynic free of charge, from the City Index PDS:


> 12.14
> Dealing with your Orders
> In most cases when the condition or event specified in your order occurs it will be executed at or very close to the price specified in the order. However, please note that for all orders other than Guaranteed Stop-loss orders, the price you receive at execution is not guaranteed.




I think it is pretty foolish (given it is mentioned in the PDS) and naive (given the broad amount of anecdotes and feedback about bucketshops) to get indignant over a CFD provider misquoting you on fills. I have a CFD account with IG, and I even use it sometimes, but I don't view that account like I view my *real* brokerage accounts.


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## cynic (27 August 2015)

sinner said:


> Did you never read the PDS? All CFD providers have clauses which basically allow them to price any asset at their discretion.
> 
> sinner performs due diligence for cynic free of charge, from the City Index PDS:
> 
> ...




Yes I did read that and numerous others that gave me ample cause to believe that their product was designed to behave as a contract for difference on an underlying asset!


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## sinner (27 August 2015)

cynic said:


> Yes I did read that and numerous others that gave me ample cause to believe that therebproduct was designed to behave as a contract for difference on an underlying asset!




It nominally, normally *is* and *does*. Otherwise people would blow them up arbing against the futs in no time. The point is that there is *no guarantee*. You walk into a bucket shop, and slam your money down on the table, anything can happen, especially if anything means a loss for you and resulting gain for the owner of the bucket.


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## cynic (27 August 2015)

Joules MM1 said:


> ok to publish what youre told, cynic ?
> 
> TIA, if yes



My preference is to await their written response so that I can quote them accurately, however, I was left with the impression that their product often differs significantly from the underlying futures market and I was advised that I should base my trading analysis solely on their charts (irrespective of the outside market)  for those reasons.


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## cynic (27 August 2015)

*Re: Traders' delusion with random patterns.*



sinner said:


> It nominally, normally *is* and *does*. Otherwise people would blow them up arbing against the futs in no time. The point is that there is *no guarantee*. You walk into a bucket shop, and slam your money down on the table, anything can happen, especially if anything means a loss for you and resulting gain for the owner of the bucket.
> 
> View attachment 64050



I understand what you're saying Sinner and fully agree that every PDS I've ever read has always included clauses that allow such things to happen. 

Do you know just how many people have argued with me that what you're describing simply never, ever happens?


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## cynic (27 August 2015)

rnr said:


> Unless, of course, the CFD provider offers DMA trades e.g. SPI ASX200.



I quite agree, provided of course that they are genuinely offering the direct market access CFD and not just calling it that as has been rumoured to happen with some OTC CFD providers.


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## cynic (27 August 2015)

On the subject of arbitrage between an actual market and a synthetic derivative of same. Are variances greater than 300 points (>1%) insufficient to draw the attention of an arbitrager?


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## sinner (27 August 2015)

*Re: Traders' delusion with random patterns.*



cynic said:


> Do you know just how many people have argued with me that what you're describing simply never, ever happens?




cmon man. If I argued with you that the DAX simply never ever gaps on high volume, or any other stupid thing, what relevance would that have to you? 

*None.*

Your due diligence is your due diligence. You read the PDS, ignored the explicit, black and white statements made therein and instead chose to back your logic with the anecdotes of a bunch of people?



> On the subject of arbitrage between an actual market and a synthetic derivative of same. Are variances greater than 300 points (>1%) insufficient to draw the attention of an arbitrager?




lol. Ok I am laughing now, because you are so indignant over this issue. What I said *specifically* is that nominally and normally the CFD follows the underlying because otherwise arbs would blow them up. *But there are no guarantees.* 

What I did not say is that crap fills are happening all the time, which is the kind of thing that an arbitrageur might be interested in. Feel free to open a real futs account and take City to the cleaners when they give you crap fills.
This post sounds like a plea from you for the arbs to come and save you from the mean mean CFD provider that you signed up to, deposited money, placed limit orders with.


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## Joules MM1 (27 August 2015)

cynic said:


> ...so that I can quote them accurately,.....




so you know


			
				 me said:
			
		

> From: Joules MM1 [mailto:****@hotmail.com]
> Sent: 27 August 2015 05:49
> To: CMC Markets Helpdesk
> Subject: trading the SP200 (XJO) cfd
> ...







			
				 CMC said:
			
		

> Trading the ASX 200
> Account number: 87#####
> Dear Mr ####-#####
> 
> ...


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## cynic (27 August 2015)

Joules MM1 said:


> so you know



Thanks for that. I am very tempted to ask if you believe them based upon your experience of their product. However, I do recognise the importance of prudence when discussing specific entities on a public forum.


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## Trembling Hand (27 August 2015)

Cynic you cannot be serious. How much of your life are you going to waste on this? 

It's like telling a friend to leave a filthy cheating partner. How much more time, literally years, are you going to be a victim?


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## Joules MM1 (27 August 2015)

cynic said:


> Thanks for that. I am very tempted to ask if you believe them based upon your experience of their product. However, I do recognise the importance of prudence when discussing specific entities on a public forum.




youre running a business.....

milkbar owner:
question: has the milk been refrigerated? (might sound like a dumb or embarrassing question, but, youre selling milk...your customers want fresh milk)

trader:
question: what are the mechanisms that make this instrument move, can you tell me about anything that might affect its price structure such as maturity/releases/intermarket requirements/costs etc? (you want all the knowledge you can get)

keep banging out the questions....belief and prudence are not required

as you are accountable to your own business, you need to hold your partners (platform/provider/datafeed) 
accountable to you as the customer

people gotta do decent business to get repeat business ...whether it's a good business idea for you as the end-user is a whole diff convo ....usually the question of appropriate business to business needs and knowledge is more the key than efficacy of conduct.....

not promoting anything here.... hinting at research 

yep and 







> How much more time, literally years, are you going to be a victim?


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## cynic (27 August 2015)

Trembling Hand said:


> Cynic you cannot be serious. How much of your life are you going to waste on this?
> 
> It's like telling a friend to leave a filthy cheating partner. How much more time, literally years, are you going to be a victim?




On this point I thoroughly agree. It has been too many years now since I first saw the writing on the wall whilst reading certain disclosures that could potentially leave me unreasonably exposed to additional risk without legal recourse.

I remember a heated conversation I had with a major provider from years back when I basically said words to the effect of "So now you're telling me this is my fault! Well you're right! This is my fault for being foolish enough to choose you as my broker!"

After that I promptly engaged other brokers and was delightfully surprised at how much easier my trading experiences became at that time.  However, it seems, that I was probably in error in my estimation of the longevity of outliers within that particular industry.


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## Wysiwyg (27 August 2015)

*Re: Traders’ delusion with random patterns*



sinner said:


> Notes:
> * You're trading EURAUD intraday outside of AUD session time.
> * You anticipated the low of a pretty tenuous pattern (IMHO anyway) and it does look like the price rallied off that low, 5 or 10 pips is the most I would expect at the "high probability" end of the spectrum on that kind of line. I would put the expected probability of it bouncing magically off that line and going straight up to the top of the "channel" at less than 25%.
> * I would have instead placed a buy stop at 1.6+spread+1 pip if I was looking for channel highs.
> ...



Thanks for your constructive view. The move was on that same bar and greater than 160 pips. Obviously the turning point to bullish of a flag as I had initially wished to trade. As CanOz noted it is frustrating but the reality is the move will happen and NOT when one expect it to. Look at the other night U.S. down massive numbers only to reverse. How many squillions sold on the Friday and Monday. I have been studying charts for many years now and trading the actual is different from the observations. Like little twists in price action, duration and intensity that are difficult for me to process. I did better when I knew less. Thanks for everyones input.


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## Wysiwyg (27 August 2015)

I suppose it is fair to state that patterns are patterns *after* they have formed. A couple of out of range bars can change everything. When price looks like it is going one way ---- it isn't.


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