How Forex Chart Patterns May Form

How Forex Chart Patterns May Form

The problem with trading is that a chart is composed in effect not of a linear tracing of event following event but rather a whole set of superimposed possibilities at every point, which happened to lead into a move, followed by another. Which is to say, at every point there were different ways for the market to move. At its most basic, this means that a pair could have gone up or down (or stayed the same, though the market tends to move).

However, the chart does not merely consist of tick moves followed by tick moves. It consists of patterns. This matters because traders are trading them, affecting the way a pair will move. These patterns will have a tendency to constrain possible moves at any given point. But always the potential is there for a move against the pattern. This is complicated by the fact that these patterns happen in different ways across time frames, each of which will tend to have traders trading on the patterns, helping to form and deform them.

So is the chart (in effect) composed of superimposed patterns (of which only the actually outcome is traced out, of course). Possibly not. This is because patterns themselves have the effect of constraining moves, down to actually making them linear. So what is superimposed. The potential perhaps to move up or down, within the constraints, moving down from longer to shorter term time frames and back out again. Back out again, because patterns forming on lower time frames (for example on 1 minute charts) can affect patterns forming on higher time frames. Again this matters because traders are trading on these time frames.

So what does all this means. It means that trading is rather like trying to track something which is only showing a part of what it is actually doing. And it is why multiple time frame analysis is important to show the matrix of constraints on a pair. In a way the market is fighting against patterns, but also being formed and deformed by them. So what happens next is in effect unpredictable, as it depends on factors which can't happen yet, but may, which is a common feature of Forex trading, that the analysis indicates an outcome, but the outcome happens later.

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