The difference of trading signals and chart patterns is in the visibility. A chart pattern has typically some spot like a breakout that is the trading signal of the pattern. An indicator or formula based trading system can of course also detect such a breakout, for instance, by having a very shortterm oscillator included in the algorithm. But there are many trading algorithms that create their signal at a different point than the chartist would.
This is more astonishing than one might think in the first moment. A trader is used to pick the right entry spot, while an investor tries to look at value alone without being disturbed by patterns. Exiting is done by executing a stop loss to get off a dying trend, or by switching a position from long to short. So, for trend traders the exit is often already a virtual signal, a difference to their entry price that has nothing to do with the actual chart.
But a trader reacting completely to virtual patterns? In its simplest form we are talking here about something like the crossing of two different moving averages. The MA is delayed itself and as such its extremes, highs and lows, are only strangely correlated to the actual price chart. A high in the price gets followed with a high in the MA after some time. Going through the chart and its MA reveals that the time shift is somewhat constant, but not precisely.
If you were seeing only the crossing of two MAs as isolated signals, it would be hard to find out what it is. Sometimes a local high or low in the chart gets followed by a trading signal of the crossing MAs, but not always. This simple trading formula of two innocent moving averages is enough to veil the origin of its result. Imagine a slightly more complex algorithm and there is no hint in the trading signals left about how they were computed.
Strangely trading with more complex indicators works. It is not what traders would do, as there are no recognizable marks for entry and exit. A trading algorithm produces a different timing, but it works, maybe.
The reason is threefold. The market is a price generating mechanism that has three ingredients, namely procyclical, anticyclical and random forces. A complex indicator detects in a way what phase the market is in right now, and when there is a switch, it gives a signal. This trading signal does not need to correlate with the hot spot of a chart pattern.
Strange trading signals are the outcome and they are good to see in a video of this trend trading neural net site, which is by the way the perfect companion for the beach trader. The signals are not always where the chart pattern educated traders would expect them to be. And yet, this software probably outrivals them easily.
