A pattern, as the word suggests, is something that repeats in a noticeable way. For example, a patterned carpet consists of repeating images that are similar or the same. But there are more useful patterns in our everyday life and, more to the point, patterns that have implications for precious metals investors. Namely, gold price patterns can help us determine the direction in which gold will head next and the same goes for silver.
First example: Let's assume we can observe that usually a rainy day is followed by three sunny days. This is a pattern! We can predict that a rainy Monday will be followed by three days of sunny weather. Spotting this pattern will help you decide when you should take your umbrella.
Second example: Suppose we observe that an NBA team wins every home game and every second away game. Based on this observation, we can predict further outcomes of games and use it to make profitable bets.
Third example: Let's say that we observe that a day in which the price of an asset rose by over one percent is followed by another positive day in 80% of cases. When we notice a pattern, we can use it to our advantage. Our strategy will be to hold our asset for one additional day after the asset rises by one percent.
Silver Price Pattern
The above-mentioned examples are very simple and assume repeated regularities (which in fact are our patterns). You may think that patterns are something unusual and that they appear only in theory, but this is not quite true. Just like our everyday life, the precious metals market is full of patterns.
Take a look at the silver price pattern below:
Charts courtesy of http://stockcharts.com/
If you take a close look at the chart and specifically at the areas marked with red rectangles, you will spot how similar these two periods are. Both price paths have almost the same shape. What is even more interesting and important, is the fact that other measures exhibit similar behavior as well, such as the RSI (a peak, a bottom, and then fluctuation) in both periods. So, when you notice this kind of situation, you can use it to draw conclusions. You may suspect that price will rise significantly following the end of the second range, because it rocketed after the first period. Since the two patterns are very similar, the situation in the market may be similar, and the outcome may be much the same as well.
Gold Price Pattern
Let's take a look at the example of a price pattern on the gold market.
There are more than one pattern that are visible on the above gold chart. The most interesting, in our view, is the tendency of gold to decline in the month that follows a month in which it rallied on huge volume. We marked those cases with red rectangles. As you can see, almost all of them share the above trait. Consequently, if we see a monthly rally in gold in the future (pattern), we know that we should expect at least a temporary decline in the following month.
The points made above highlight the advantages of using patterns in gold and silver markets. The elements of a pattern repeat in a roughly predictable way. Therefore, we can use investment tools or, in some cases, templates to generate probable future price paths of precious metals.
However, there is one big problem with patterns. They are extremely hard to spot for an untrained eye. Most patterns were discovered by great economists after months or years of research, but there are still thousands of undiscovered patterns that are undetectable at first glance (called “hidden patterns”). Since spotting a pattern is very complicated, many try to use computer software to determine them and ask professionals for assistance.