Psychology
When traders tend to trade and take positions whether they are in crypto markets or Fx, especially when they are retail traders, they tend to look out at certain market structures. These market structures are widely used to take positions in the market since generally they are biased and have a high probability to play out in a certain direction. These patterns are influenced by mass psychology and it plays a pivotal role in its playing out.
Famous patterns
Some of the famous patterns are shown below in the diagrams. These patterns are widely used by retail traders who mainly use them as the basis of their strategy.
Four patterns are shown above i.e. Double Top, Double Bottom, Head and Shoulder, Inverse Head, and Shoulder. These are some of the most commonly used patterns in the market. These have a high probability to break in a certain direction. For example, when a double top is being created, traders may short the position when they see that the pattern is playing out and it.
Why do these play out in Most Cases?
These patterns have a probability of breaking down to one side as compared to the others. These patterns are taught everywhere, in classes, YouTube, and other social media platforms, and hence as a result a lot of people use them. Whenever people see these patterns forming they enter the market. As a result huge influx and positions are created at these points. As a result of these new orders, these patterns play out.
But these patterns don’t play out every time. Why? Because sometimes the institutional orders are placed in such a way that they go against the side where these patterns were supposed to play out. Since institutional orders are way much bigger in size as compared to the retailers hence the patterns fail.
Mass phycology is not only applied to such patterns but also affect the visible horizontal and dynamic supports and resistances.
How to Trade these Patterns?
Your whole trade solely shouldn’t be based on these patterns alone. Additional confluences and confirmations should be used to take trades that have a high probability of playing out in your favor. See also “Trading 101: How Confirmations are used during Trading”.
You can find these patterns from seconds to monthly charts. But since we need trades to go in our favor so it is important to note that generally higher the time frame, the higher the chance of the patterns to unfold in that particular direction.
