Adam & Eve Tops
Anticipating  A Selloff
Andrews Pitch Fork
Bid-Ask
Bilateral Trade Setups
Bollinger Bands
Bottoms
Breakouts
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Daily Range
Declines
Exit Strategies
Exploring Market Physics
Dow and Elliot Waves
False Breakouts and Whipsaws
Flags and Pennants
5 Fibonacci Tricks
Finding Stocks
Fun With Fibonacci
Gaps
Greed and Fear
Highs
Low Down On Bottoms
Market Timing
Head and Shoulders
Hell's Triangle
Momentum Cycles
Momentum Trading
Morning Gap Strategies
Moving Average Crossovers
Overbought/Oversold
Pattern Failure
Pitfalls Of Selling Short
Playing Failed Patterns
Point and Figure
Pull Back Day Trading
Risk/Reward
Reversals
Selling Declines
Stochastics
Scanning Tips
Stage Analysis
Surviving Bear Markets
The Big W
Tale Of The Tape
Tape Reading
Time Trading
The Gap Primer
Tops
Trailing Stops
Trading Execution Zone
Triangle Trading
Trend Waves
Trend Direction and Timing
Trends
The Profitable Trader
Uncharted Territory
Williams %R
Wedges and Volume
20 Golden Rules
20 Rules For Trade Execution
20 Rules To Stop Losing Money
5 Wave Decline
3-D Trade Execution
Voodoo Trading

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Pattern Failure

 

Patterns appear at the end of thrusting price movements. They are characterized by constricted swings between key support and resistance levels. Pattern development completes when a new trend leg breaks through this wall into directional price change. This new thrust may be in the same or opposite direction as the previous one. A pattern between adjacent price moves in a single direction continues that trend. Alternatively, when a breakout turns and retraces the last trend leg, the intervening pattern reverses the prior move.
You can categorize most patterns by their tendency toward continuation or reversal. This familiar bias underlies the predictive power of these structures. By their repeating nature, a well-marked chart landscape can be drawn to profit from the expected breakout. Use classic observation and well-chosen technical indicators to examine patterns as they develop. Their bullish or bearish nature can often be identified well before completion and exact entry points chosen where new price momentum will likely erupt.
But sometimes patterns won't do what the crowd expects.
One of the most powerful signals in pattern analysis flashes when a setup fails to act according to its tendency. This pattern failure often triggers sharp price movement in the opposite direction from the formation's natural bias. Have a contrarian entry system based on this reversal waiting in your trader's toolbox. But first exercise sound risk management as you recognize this event in progress and wait for ripe opportunity to appear.

Probability underlies all prediction. Through skilled observation or system-driven signals, technicians anticipate future price movement and enter trades they hope will profit from it. But the most common price patterns often fail to act as expected. Look to the edges of these rogue formations to identify trigger points where price signals a break in the low-odds, high-profit direction. One obvious example can be seen in the unexpected Tellabs rally after it drew a recognized reversal formation.

The classic Head and Shoulders reversal has been subject to intensive study over the last century. In fact, one popular investigation discovered this well-known pattern works only 79% of the time. While this figure lies well outside random outcome, it illustrates just how wrong you might be the next time you sell short at the H &S neckline.
 

Think Contrary: Sell short at the Head and Shoulders neckline? That classic TA advice got traders into major trouble in early 1999 on TLAB. When price rose beyond the level of the right shoulder, the pattern failed and smart traders prepared for low-risk long entry. The break at the tops of the head and right shoulder signaled confirmation AND also offered an easy pullback trade.