Having been schooled by one of the greatest chart pattern traders ever (Peter Brandt), has given me a love and appreciation of the art. For those who don’t know, little of mastering and succeeding at the skill is about pattern recognition but instead, risk management. As it turns out, that is no different than anything when it comes to the investment world.
As you can see in the PAGS chart below, a textbook head and shoulders pattern with negative RSI momentum divergence is screaming out “SHORT ME”. Well, not immediately because every pattern needs a confirmation before entry, this one being when price falls and stays below the green horizontal support line. If that were to occur, the pattern’s target is down at T1, a nice 30+% decline. As ideal as this setup is, the probabilities of failure are good because the overall trend of the stock market over time is up and any short would be taking a position against the longer-term trend. So, a decision has to be made either and then decide whether to avoid the lower probability setup (even as good as the setup looks) or take it and keep a shorter leash (minimizing losses) in case you are wrong.
The fun thing about shorting is that when they work, they typically work much faster than from the long side. As they say, stairs up, elevator down.