Traders make consistent money because they are not wedded to a stock, a position or a view on the markets. When facts change, traders change their position.
It's not a very satisfactory situation for people who want certainty or firm predictions but it is very profitable. This is the reason traders use stop-losses while many investors do not even understand the concept, let alone use a stop.
Traders were called on to exercise this agility and flexibility this week when the dollar index (New York Board of Trade (Futures): =USD) staged a strong rally to close the week at $0.973.
The rally is not so important. What's important is the strong close above the downtrend trend line A.
Does this mean our analysis from last week is incorrect? The analysis is correct, but our conclusion that there was, on balance, a bearish bias, was incorrect. The symmetrical triangle is a pattern of indecision. The potential to break up or down from the pattern is around 50 percent either way. We used the dips below trend line B to identify a slight shift in the balance of probability towards the bearish side.
Analysis is one step. Trading is the next step. We noted last week that chart pattern analysis provided a good strategic understanding of the market, but traders wait for confirmation activity prior to taking a position.
In this case, traders did not get confirmation of the bearish view. The U.S. dollar index - which measures the greenback's value against a basket of currencies - did not move below trend line B so no entry signal was generated, which is the key difference between aggressive and conservative trading.
Aggressive traders move in anticipation of a pattern breakout. In a strong pattern with a high probability of moving in one direction, it's suitable to take an aggressive position in anticipation of the breakout. But in weak patterns, such as the symmetrical triangle, it is more prudent to wait until the breakout is confirmed.
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The conservative trader in the dollar index waited for confirmation of the breakout. This week, the trader has confirmation to go looking as the dollar index moved above the value of trend line A. The upside target is $1.035.
Now, we'll update the analysis from last week.
One of the weakest patterns in technical analysis is the equilateral or symmetrical triangle pattern. It's weak because unlike the other types of triangle patterns, the symmetrical triangle pattern does not give a clear advance indication of the direction of the breakout. It is, above all, a pattern of indecision.