Thoughts on Technical Analysis (Part 2)

1. Trading systems do not yield the same results in all markets (or across all timeframes).

2. All markets have their own characteristics. For example: XMR moves within ranges and experiences strong volatility spikes, while the S&P 500 is highly trend-driven with a strong upward bias (since 1984, it has closed bearish only 7 times).

3. Effective trading systems with lower win rates are generally the most profitable, as they are trend-following and have long periods of market exposure.
*Note: Longer exposure period = Higher failure rate = Greater profits when catching a major trend.*

4. Reversal patterns in bullish trends with an upward slope are extremely dangerous, as such a slope indicates strong buying pressure. Reversal patterns in bearish trends with a downward slope are dangerous, as they indicate the presence of selling pressure.

5. Market participants are drawn to historical patterns, confluences, favorable risk-reward ratios, and protected stop-losses. (This is why it’s a bad idea to trade without a protected stop-loss or with a risk-reward ratio below 1:1).

6. Algorithmic trading systems are trained based on historical patterns and confluences.

7. Generally, when a good technical analyst is uncertain about what might happen next, it’s because many participants may be uncertain as well, so it’s wise to stay out of the market. The best opportunities present themselves clearly.
“Strength manifests itself, it is not predicted.”

8. Catching prices in free fall (“catching falling knives”) or trying to halt bullish trends with extreme momentum (vertical rallies) is the quickest way to blow up an account. If there is no exhaustion pattern or formation, there is no protected stop-loss. Without a protected stop-loss, there’s no way to calculate the risk-reward ratio. Without these elements, participation drops drastically.

9. Reversal formations (e.g., Head and Shoulders) with descending necklines (in bullish trends) typically offer few opportunities for profitable trades. Reversal formations with ascending necklines (in bearish trends) generally provide few profitable trading opportunities.
*Explanation: Placing the stop-loss behind the high (in bullish trends) or the low (in bearish trends) results in a risk-reward ratio below 1:1, which attracts little participation. This often triggers a correction that may draw opposing market forces.*

10. Classic authors emphasized market manipulation, used multi-timeframe analysis, and understood mass psychology deeply. Meanwhile, the daytrading industry was built to attract undercapitalized masses.
Keep your timeframe above H4, and you’ll witness the magic.