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Why are your trend lines always inaccurate? 🤔
Chart patterns are very popular among technical traders, as they are based on key technical market analysis.
Why is it that everyone draws support and resistance trend lines differently on the same chart, and it seems like everyone believes they have mastered the trading Bible, boasting about their skills? Little do they realize that danger lurks in the shadows—the risk of overfitting can reinforce our biases rather than objectively constructing patterns.
Overfitting refers to traders drawing patterns arbitrarily without any objective rules, hoping to support biases or conclusions they have already formed through other means.
As shown in the chart, the same price movement can have 8 or more different trend lines drawn. Some of these patterns are considered bullish, while others are considered bearish. If you further convert the chart scale from linear to logarithmic, you'll see a different set of patterns or even more patterns than those displayed at the same prices.
Traders cannot distinguish between correct and incorrect patterns. When we talk about correct and incorrect patterns, they are unrelated to trading outcomes. Even trades based on correct patterns can fail. Here, we only discuss patterns that are essentially objective and do not depend on the subjective biases of analysts.
A truly failed pattern is one that is drawn inconsistently and unstably over time, leading to inconsistent analysis. Traders cannot develop reliable strategies based on such patterns because they do not know whether the failure is due to incorrect pattern drawing.
Ok, that was all nonsense earlier; now here is the main content 😂
The only way to overcome the risk of drawing patterns based on biases is to define clear, objective rules. Usually, zigzag indicators are used to algorithmically identify patterns on charts. Below is a set of such rules.
Drawing zigzag on the chart
Find and draw a trend line connecting 2 or more pivot lows where the price has not broken below the downward trend line.
Find and draw a trend line connecting 2 or more pivot highs where the price has not broken above the upward trend line.
When drawing trend lines, they can touch pivot candles at any point, but candles should not be outside the trend line.
Consider false moves for fine-tuning.
At least one of the trend lines should connect 3 or more pivot points. The other can connect only two pivot points.
After following these steps, do you see a clear pattern? If yes, then you have found your pattern and mastered the skill of defining it objectively and without bias.