Using Technical Analysis to Predict Human Behavior
As you begin to earn more experience in the market you’ll notice that making predictions in the financial markets is much more about understanding crowd psychology than understanding indicators or fundamental events. This is one of the reasons that as I’ve evolved as a trader I’ve gotten more and more into looking at a price chart more as a story unfolding vs. just red and green candles. The more you understand people & how people think/react, the better the trader you’ll become.
One of my favorite techniques in doing so is a very simple one called the “equal measured move” aka the ABCD pattern. The AB=CD pattern is a very simple pattern formation where a trader looks to predict where future price action will travel to based off of the previous extension that price just made. This is essentially a way of predicting the harmonic motion of the market & to a deeper level predicting, the predictability & comfort amongst the traders involved.
Humans are pretty predictable, and the reason for that is because we enjoy our comfort. We like to multiply by 10’s & 5’s because it’s easy for our brain to understand. We like place stops or targets at round numbers such as 116.00 because that number “feels” safe. Even from a marketing perspective, almost all prices are stated at $2.99 or $2.97 because we look at it as being closet to $2 rather than $3. We like to divide by half’s, thirds & quarters or double & triple when multiplying because it’s an easy concept for our brain and eyes to grasps.
So when making a prediction for a future move, it’s common to see price complete an “equal measured move” because it’s easy for our brains to understand, visualize & give power to. This is why I like using the ABCD pattern in my analysis for both making predictions on where to enter trades, but also on where to exit.
Now BEFORE you go out there and try to capitalize on this information, REMEMBER that nothing in trading works on its own. Trust me, once upon a time I nearly went broke thinking I could just trade every ABCD pattern that I found. This is, however, an important tool that you can add to your arsenal in order to help you narrow down your kill zones when looking for entries and become more precise when predicting targets.
More more on how to use the ABCD pattern check out this video I released on youtube walking you through how I like to use them for both entries and target projections.
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