“Well, not everybody understands the patterns” Limitless 2011

19 de abr. de 2023

In the movie Limitless (2011), Eddie Morra (Played by Bradley Cooper) takes a mysterious pill, NZT-48, that turns him from a struggling writer to a financial wizard. The pill unleashes 100% of his cognitive power, transforming him into an intellectual powerhouse.

About 40 minutes in, there is a scene.

Hank: "Pattern recognition. That's your snake oil?"
Eddie: "Well, not everybody understands the patterns."

Why am I sharing this? Well, because not everybody understands the patterns, especially most traders.

Did you know that chart patterns actually work?

Not all patterns work, just some of them.

Although there are numerous patterns in technical analysis books, many of them are actually snake oil.

Take, for example, the Bull Flag; this is a Flag pattern occurring in an uptrend, usually during a bull market. The flag pattern is proven* to be snake oil; it is no more than a 50/50 chance of success.

Only one flag pattern works; it is called a high tight flag* and works 85% of the time.

The chart above (NVDA) is an example of one of the most accurate and successful patterns in technical analysis.

The Inverse Head and Shoulders.

The inverse head and shoulders is a well-known chart pattern. But how reliable is it?

Based on thousands of tested trades from 1996 to 2020, it has an 89% success rate and an average price increase of 45%.
Two decades of research* shows an inverse head and shoulders chart pattern has an 89% success rate for a reversal of an existing downtrend during a bull market.
When this pattern works, it averages a price increase of 45%; this is one of the most reliable chart patterns.

In fact, the NVIDIA chart above made 43% and has exceeded the target.

Trading is a Game of Probabilities

Trading is definitely a game of probability, but few traders understand the actual probability of each trade.
Now that you know the inverse head and shoulders is 89% successful with an average upside of 45%; you can assess your risk/reward and make better trades.
Sure, there is an 11% chance of failure and a lower-than-average price increase, but now you know the odds.

Take TradingView's NZT-48 Pill

In the movie Limitless, Eddie takes the NZT-48 pill and becomes a top trader.
But did you know that TradingView is like the NZT-48 pill?
How?
Because the inverse head and shoulders pattern in NVIDIA (chart above) was discovered and annotated with TradingView's pattern recognition algorithms.

TradingView does the hard work for you; it even sets the correct price target and lets you know when it is reached.

If you are trading and not using TradingView's in-built pattern recognition, you are not utilizing the NZT-48 superpower.

How to Turn On Pattern Recognition in TradingView

Click Indicators > Technicals > Patterns
Next, select the patterns you want.**

I hope this was useful; if you like, hit like. If you want more, hit follow.

Happy trading, traders!

*Source: The Encyclopedia of Chart Patterns (2021 Wiley) by Tom Bulkowski
**I would not recommend using the Pennant Patterns; they are proven not to work.

18 de jun. de 2023

Nota

Well, this idea worked out very well indeed.