There are two reasons why the trend is the best chart pattern. First, the probabilities that any other chart pattern just occurred by random is much greater than with a trend. This is of course dependant on the clarity of the pattern, the sharpness of the trend and the time or number of bars that form the pattern. Overall it is much easier for the trend to form a chart pattern with statistic significance. Trading pattern clearness is what counts.
The other reason is the potential. If there is a trend, there is some disparity of demand and supply and that continuously. Potentially this disparity can stay there ad infinitum. That is why, for instance, a growth stock during its fulminant lifetime as such, can rise hundred fold. It did not jump all at once to its final trading level. Strangely the market undervalued the stock all the way long – something that should efficient market theorists feel uneasy with their “it is all priced in” theory.
To say it in other words, every tiny trend, even a five minute intraday rush, has the potential to grow unbelievable and that literally. Essentially you could hop onto that day trend, and find yourself still holding a growth stock many years later. In that five minutes the market realized the first glimpse of what would come. For recurring day sprints during the long uptrend the market realizes again and again incrementally the undervaluation.
Now compare that to other chart patterns. What potential do they have? The answer is not that with the same probability an ongoing upmove that results in a long running trend could happen directly after the occurrence of that price formation. Sure it could, but it wouldn’t have been indicated by that pattern, nor would it have anything to do with it.
The worst indicators or signals for potential are the anticyclical chart patterns – something that banks on overbought and oversold conditions or relies on lines of support and resistance. These anticyclical patterns are potentially counterproductive. They may not only indicate a small and unknown potential, but, because the price moves into the wrong direction, they may even have a negative potential.
Perhaps there is also a third reason why trends outrival other chart formations. A trend has already the action the trader wants. The price moves right now. What can be better than starting the money machine instantly?
Chart patterns in trends are still interesting hooks for trading system designers. The trend adds the potential and the chart pattern adds hordes of chartists jumping on board at the same time. As always in trading, do what the masses do and detect that with your trend pattern machine to exploit the additional starting boost.
