Ask Colin

Are reversal and continuation patterns more relevant in the short-term or can they be as effective in the medium/long-term?

It may be better to consider them separately.

My experience is that reversal patterns on longer term charts are very powerful. They mark the change in major trends. If I am following an uptrend and I see a break down from a reversal pattern, you will not see me for dust.

Likewise if I see a major reversal pattern after a downtrend and there is an upward breakout, I will be looking to investigate that stock with a view to taking a position.

Continuation patterns are more problematical for me in longer term charts. I see many examples where they are just as effective as they can be in the short term. However, I like to feel that I understand the behavioural dynamics behind a pattern. I continue to wonder whether the same behaviour is exhibited over a longer time frame. Then again, there are so many of them that seem to work out, maybe I am being too cautious.

However there is another aspect to consider. I like the way Dan Gramza and others look at candlestick patterns – set-up, confirmation and follow-through. I think the most dangerous thing you can do with charting is to see a pattern and make a once-off decision and stop thinking. Charting patterns are about probability rather than certainty. We should be looking constantly for feedback that confirms that the probable outcome is unfolding. So, if you get a pattern forming, there should be confirmation in the form of a breakout. Also, there should be follow-trough from that breakout. If you don’t see that follow through, it may be one of the situations where the textbook outcome does not happen.