A trader should spend more time on basic skills, such as: really learning how to read charts, keep a trading log, work on his emotions, let the trade win and accumulate and cut losses, control risk management, and avoid gambling-style thinking.

If traders are honest with themselves, those things will likely have a much bigger impact on their performance than falling into bad habits.

As Einstein once said: "Any intelligent fool can make things bigger and more complex ... It takes a touch of genius - and a lot of courage to move in the opposite direction." Therefore, we must avoid pattern thinking and look beyond conventional chart patterns in order to fully understand what the market is trying to tell us.

When we break down the complex patterns into individual chunks, we can understand any chart trend.

Each chart pattern can be broken down into individual trend analyzes. Each trend consists of individual waves. Each wave can be divided into candles. And each candle contains more detailed information.

For example, we can see an engulfing pattern in the daily left panel chart. The middle H1 frame chart shows the same information with a little more detail, and the H1 bracket chart on the right shows that the submerged pattern in D1 is actually the Shoulder-Head-Shoulder pattern on the H1 chart.

Another example is trend analysis based on highs and lows. Some traders may find this too simple, but traders who understand that the highs and lows are essentially the fingerprints of market participants appreciate such an approach.

In bullish markets, the price will often make higher highs and lows. This is the only way the trend can move higher. Once this behavior is broken and the bulls are unable to push the price to new highs, technical traders must take great care. The price is then so high that previous buyers do not want to buy any more (even take profits and sell) and the price is now high enough for sellers to enter the market. As the market started making lower highs and lows, the trend momentum turned bearish.

Of course, we can take the analysis one step further. Besides the usual highs and lows, we should also see how those highs and lows are formed. We don't have to make it too complicated. Take a look at the chart below, you can see the following:

  • The uptrend begins very strongly, indicated by the first steep trend line.
  • The trend then loses momentum when we see the slope of the trend line decreasing.
  • At the same time, it will be difficult for the price to make a new high, and ultimately fail to make a new high.
  • Bearish trend waves also become deeper as an uptrend unfolds. This tells us that more and more sellers are entering the market and buyers cannot easily absorb all of the seller's needs.
  • After all, the market reversed and started a new downtrend. All of the previous clues hint at that.

As you can see, trend analysis becomes relatively simple and suddenly price analysis makes sense when you see it through the eyes of the buyers and sellers, right?

The beauty of this approach is that it doesn't take us long to understand any of the charting situations. Each chart pattern can be broken down into smaller sections for analysis. What's more, analysts can then trade chart patterns even if they don't look like the patterns in "textbooks" because now they know how to read price action beyond what is normally taught...

Let's think about what the Shoulder-Head-Shoulders pattern actually tells us: Price starts in a downtrend when price makes lower highs and lows. However, the trend wave from the left shoulder to the top is unlikely to create new lows. This tells us that the sellers are no longer in complete control. Then the price breaks out of a new high and the right shoulder suggests the price is even making a new higher low. These points clearly indicate a change in the balance of buyers and sellers. What happens next is usually an uptrend.

In fact, you will never come across two identical Shoulder-Head-Shoulder models, which is why this approach is so useful.

Observe the Shoulder-Head-Shoulder model below. The left shoulder signals that the uptrend is not very strong as the price has taken a long time here. The Bulls couldn't make the price go higher so easily. After that, the trend wave from left shoulder to head was also very short and the price really had a hard time making a new high. The right shoulder is the final key to the story as it shows the buyer has lost interest and is unable to move the price up. The right shoulder shows final and very weak attempts to move the price higher.

The sellers are in control now and the downtrend has been indicated by all the individual clues before.

And we can look even deeper inside how trends move. Candle size and the ratio of beards to real bodies also tell us a lot about the microstructure between the bulls and the sellers.

During trending periods, candles often have a short or absent beard. In addition, the real body size is often larger than the market at the end of a trend or sideways trend. Why is that? Because in strong trends, one faction of market participants will take the lead and be able to move the price in the direction of the trend with ease. The more dominant one side of the market (Bulls or Bears) is in the market, the faster the candlestick usually moves and the smaller the beard. We can observe that in the trending periods below.

Also, the distribution between bullish and bearish candlesticks is very unidirectional. We can clearly see how the trend is dominated by a bearish candle in a downtrend or by a bullish candle in an uptrend. A change in this ratio tells us immediately that market opposition is on the rise.

When the trend slows down, the real body size usually decreases and the beard size usually increases. This happens because the balance between the buyer and the seller is no longer one-sided, and both sides are actively "fighting" for control. The figure below shows how this plays out at the end of the trend.

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