When it comes to technical analysis, it is often said that chart patterns give traders a glimpse into the future movement of an asset's price. It is said that patterns such as head and shoulders, double bottoms, wedges, and triangles promise to unravel the mysteries of market behavior and guide traders in making informed trading decisions. Therefore, these patterns have been attracting the attention of traders for a long time.

In some cases, traders consider chart patterns to be reliable indicators, and the large number of performance percentages on the Internet also supports such assumptions. A study by Michael Kahn showed that chart patterns have some accuracy in predicting price reversals, with an 89% success rate of prediction through head and shoulders patterns

Day by day, this advantage of chart patterns can bring good profits to traders, but is this 89% data accurate for such an optimistic percentage? Can chart patterns really reflect future price direction?

Chart patterns: What every trader should know

Chart pattern analysis is not without its skeptics. Skeptics argue that the hypothesis that "current price movements are somehow correlated with the past" is flawed, as dynamic financial markets are influenced by a variety of factors that are far from predictable based on historical data. News events, economic indicators, and investor sentiment can significantly influence price trends, making chart patterns less reliable.

While chart patterns can provide insight and take the guesswork out of it, it's best for traders to make informed trading decisions in combination with other analytical tools rather than relying solely on this one tool. For example, traders can add fundamental analysis and market sentiment analysis to make the analysis more comprehensive.

Fundamental analysis can reflect current economic conditions and performance and can account for unexpected changes. Market sentiment assessment measures the overall sentiment of market participants, which is often more important than logical and statistical evidence.

In contrast, there is a point of view that supports the application of chart patterns and technical analysis, and this view is difficult to ignore.

Self-fulfilling prophecy phenomenon

The intertwined relationship between chart patterns, trader psychology, and market dynamics adds complexity to this discussion. When a large number of traders identify a potential reversal based on standard chart patterns, the collective behavior of traders influences the direction of the market, potentially making this pattern prediction a reality.

In addition, there are thousands of AI trading bots on the market that also use chart patterns as a benchmark for prediction. Depending on the formed chart pattern, these robots can open and close hundreds of orders per day. With the combined actions of humans and robots, the market develops according to the chart patterns predicted by traders.

The phenomenon of self-fulfilling prophecies underscores the volatile nature of markets and the potential impact of collective actions by traders on price movements.

conclusion

While chart patterns can give you insights, they should be used in conjunction with other analysis methods. Market dynamics, trader psychology, and the potential for self-fulfilling prophecies can all influence the effectiveness of chart pattern analysis.

The statement at the beginning of this article that the head and shoulders chart pattern is 89% accurate is yet to be confirmed and may need to be corrected. While this data is widely circulating online, Kahn's research is more nonsense than methodology, and may not have existed in the first place.

David Aronson's 1994 study is more reliable, which is also available online. The study found that the head and shoulders pattern is up to 64% accurate when predicting reversals in a downtrend. Of course, the accuracy of this data is also difficult to confirm. If you want to dive in, you need to buy Aronson's books.