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Hello RT,
This old article might be interest to some.
Patterns are a part of life. They are the everyday recognizable groups or
familiar combinations. Our whole universe is pattern based from DNA to differ-
ent electron groupings to galactic structures. Patterns of letters and words
can also create an infinite amount of written thoughts. They can be even be
found on any price chart, but using them as a predictive tool might be as
difficult as judging a book by it's cover.
41,000 3-Bar Patterns
Ken T. - MARKETRY c1994
Our focus is on the markets, any market, any time-frame. Chart Patterns
shouldn't be difficult to identify. We've spent our whole life practicing
variations of this life/art form. Are they really important or just a man-made
convenience? Which part of the cause and effect equation do they represent?
Obviously, to use them to our advantage, some should be more important than
others. Any analysis should be application oriented and our goal is to improve
our financial bottom-line. Will patterns hit the mark or be just another myth.
Learning how to read a chart should start at the Bar-to-Bar level. The 2
basics are their relative position to each other and how they were formed.
Dissecting the bars to look at the top and bottom halves can also be quite
informative. We will start by creating one matrix for the Bar to Bar relation-
ships and another for the Bar Construction, that is how a bar was created.
With just these 2 elements, over 41,000 distinctive 3-Bar Patterns can be
identified.
First, The Bar-to-Bar matrix starts with a reference bar. Any type Hi-Lo
bar will do. (the any-type-bar is next to the any-key on the keyboard).
>From bar 1 to bar 2 the 2nd Hi is either obviously higher or lower. If not
clear, people will say its about the same, so we'll call it "even". The same
thing is now applied for bar 2 to bar 3. The illustration below shows just the
top half of the bars. The same should be done for the bottom bar halves.
The symbols used are H = higher L = lower and E = even. Starting
with the reference bar #1, the next 2 bars HI's are either:
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HH LL HL LH HE LE EH EL EE.
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The lows are done the same way. There are 9 different ways the Hi's come in
and also 9 for the Lo's. So here is a 9 X 9 matrix or 81 combinations.
41,000 3-Bar Patterns - Pg. 2
The next part shows how each bar was created. Either the Hi came first or
the Lo did. The smaller time frame bars, which ours are made from, can
actually
be double, triple tops and bottoms, with all kinds of intra-bar retracements
etc. Therefore for simplicity, we will consider only 1 Hi and 1 Lo per bar.
To see in general how a bar was created, take any daily chart for example.
Draw a box around each consecutive 5 bars and note the Hi, Lo, Open and Close.
This is what that weekly bar would look like. In some, the Hi's are made
first and some the Lo's. Of course in some you got your doubles and triples
and so on, but this is a simplified version.
A bar will be identified by which extreme it hits first. One that makes a
Hi first will then have to make its Lo. This is called a Top bar (T). A
Bottom (B) bar makes the Lo then its Hi. So each group of 3 bars will be
called by which extreme each bar hit first. They 8 possibilities are:
TTT TTB TBB TBT BTT BTB BBB BBT.
In the real world, the brain does more "best-fitting than we realize. So,
if a bar doesn't Open or Close at the Hi part or Lo part of the overall bar,
we make a judgement that it was "sorta at the middle". Breaking a bar into
thirds accomplishes the same type of divisions. This "sorta in the middle" guy
will be called a Middle (M) bar. If a bar opens around the middle, it will
then hit the Hi or the Lo next followed by the other bar extreme.
Therefore the possibilities of each of the bars are:
TB BT MTB MBT - just for the Open Hi and Lo
TB = opens at Top, went to Bottom
BT = opens at Bottom, went to Top
MTB = opens in Middle, made Top, went to Bottom
MBT = opens in Middle, made Bottom, went to Top
TB BT TBM BTM - just for the Hi, Lo and the Close
TB = made a Top, closed at Bottom
BT = made a Bottom, closed at Top
TBM = made a Top, went to Bottom, closed in Middle
BTM = made a Bottom, went to Top, closed in Middle
Putting it all together, ONE bar can do (at least) 1 of 8 ways as follows:
TB BT BTM TBM MTB MBT MBTM MTBM - for Open, Hi, Lo and Close.
41,000 3-Bar Patterns - Pg. 3
After 3 bars, you have 8 * 8 * 8 or 512 possibilities of how 3-Bars can be
created. Multiplying that times the 81 Bar Relationships will equal 41,472
3-Bar Patterns. (4-Bars = 3,000,000 5-Bars = about 1/4 billion).
THE 8 WAYS OF BAR FORMATION - Showing the Open, Hi, Lo and Close
..................................................................
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1 2 3 4 5 6 7 8
..................................................................
1. HHLL 2. LLHH 3. LLHM 4. HHLM
5. MHLL 6. MLHH 7. MHLM 8. MLHM
..................................................................
The above variations are only of a simple type. Other influences for this
exercise could also include Bar Size or True Ranges.
OPPOSING VIEWS
Patterns are conveniently attractive and have inspired Pattern Finding
software, studies on bar ranges, breakouts and different time frames. All of
which can be easily found.
You must Believe what you see as it is, and not because of the myriad of
chart forms and shapes try to justify your convictions. One person can't wait
to buy what someone else is glad to sell. Isn't that what makes the markets
merry-go-round. The "pattern anticipator" traders play with an open hand and
are always leaving their markers all over the charts.
If the markets (and life) are different types and levels of patterns on
and on, why go hunting historically to find more, when the obvious ones are
not understood yet. From a probabilistic view, the predictive value of what
"might happen" must be more than pre-historic in every sense. It must first
answer the question of WHY should it work, but if analyzed out of context
from the larger pattern, the value greatly diminishes. Are the other patterns,
which do not conveniently combine into common shapes, really less important or
just more difficult to simplistically categorize.
Going with the trend is accomplished by identifying a different set of
patterns. The same goes for non-directional trends and "discontinuances of di-
rection". We gotta "go with the flow" and deal with Whatever the markets
throw at us all the time. If we make the effort and look a little closer,
maybe we'll find something basic to ALL patterns. Possibly The REAL clues on
the bar charts are not the obvious finds but what causes them.
Ken T. /\/\/\ + \/\/\/ = -----------
MARKETRY - c1994
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