When Technical Patterns Depend on Market Beliefs

# Changes of patterns in technical analysis?


# Changes of patterns in technical analysis?












Given the assumptions listed as 1,2 and 3 here https://www.investopedia.com/terms/t/technicalanalysis.asp

What do you think about the idea that old technical patterns/trends should definitely not work any longer given that central banks and passive flows has taken an increasing place in the market?

The basic assumptions are that the market is efficient and the consequences follow trends based on that efficiency and the psychology of the actors. The central banks and passive flows changes this significantly as they have a completely different psychology and disrupt what is generally considered effective due to their different psychology as well as altering the current psychology. Shouldnt this question the relevance ofthe old trends and patterns?

Furthermore the whole market structure must have changed significantly with the introduction of passive and algos etc the "psychology" of these actors is way different then say a fundamental trader from the 70's

Anyone has some thought on this?

## Answer by Martin Georg Haas (score 1)

https://quant.stackexchange.com/a/57969

To make it short: technical trading rules work if they are either (A) true or (B) believed to be true by enough traders. If the dominant market belief changes, old beliefs of category (B) should not work anymore.

Technical trading - as I understand it - is based on the assumption that there are certain patterns in stock charts which repeat or indicate price movements in the future, making stock prices (or other values) somewhat predictable. Now, in my opinion this is working because enough traders believe in these patterns and behave accordingly in their trades - generating this exact predicatablility.

So to the extent that technical trading works because of these coherent group beliefs, it only works for the patterns which are currently used by most traders (or at least enough to make a market impact). If no one believes and acts upon outdated or obscure patterns, they will most likely not work.

This said, if there might be patterns which are based on proven aspects of financial markets (such as arbitrage or certain psychological principles) - i.e. they actually reflect the financial reality. These should work in general, if they have a large enough impact.