Ask Colin

Is there any way to assess the reliability of reversal patterns?

There has been some work done on this. See Curtis Arnold's book PPS Trading System.

However, I do not hold it in very high regard. These sorts of statistics are not where I think the real game is. For a start, they do not take into account where the pattern is in the development of a trend or the flow of bull and bear markets.

To take a simple example, an ascending triangle pattern is bullish. But I would put far more weight on it after a big fall than a big rise.

Frankly, reversal patterns are very much second or third order issues for me. They come a long way after trend analysis. I only use them because some trends end in recognisable textbook patterns and it helps a bit to be able to recognise them. However, all you really have to know is that a trading range after a long rise is a reversal pattern if it breaks out downwards and a trading range after a big fall is a reversal pattern if it breaks out upwards. Probably there are more reversal patterns that do not fit a textbook pattern than ones that do.

So, there is no way to know if a given wedge pattern is more reliable than a triangle somewhere else. However, if the context is taken into account, we might form a judgement that may be right more than 50% of the time.

To put some of this into a kind of perspective for you, If I was completely ignorant of textbook patterns, I could still make money. Knowing about them is useful, but probably does not alter my results.