What is a chainsaw pattern?

The chainsaw pattern describes the movement of a security when, at a certain time, the price of the security moves in one direction. But then it quickly moves in the opposite direction. There are two types of chainsaw patterns. The first involves an upward movement in the stock price. which is followed by a sharp downward movement. which causes the share price to decrease compared to its initial position. The second type occurs when the stock price drops for a short period of time. And then it suddenly increases upwards and makes a positive profit relative to the stock’s initial position. It is better for beginners to cryptocurrencies to familiarize themselves with professional digital currency training first.

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Key points of the chainsaw pattern

The chainsaw pattern describes the movement of stocks in a volatile market, when stock prices suddenly change direction.

There is no set rule on how to handle chainsaw moves in a volatile market because it is an unexpected move.

Chainsaws in securities trading often lead to trading losses.

Day traders wait for chainsaw movements and often assume that they are long-term, buying and selling to avoid price fluctuations in order to avoid losses.

Understanding the chainsaw pattern

The origin of the term electric saw is taken from the action of pressure and tension of wood cutters when cutting wood with a saw of the same name. When a trader is considered a “whip”. When the price of a security they have just invested in suddenly moves in the opposite and unexpected direction. (What is the Bitcoin Misery Index (BMI)?)

Chainsaw patterns in volatile markets where price fluctuations are unpredictable. It is more noticeable. Day traders or other short-term investors are used to cheating. Those who take a long-term, buy-and-hold approach to investing can often avoid market volatility and emerge with positive profits.

For example, when an investor goes long on a stock. The price is expected to increase over time. However, there are many cases where an investor buys a company’s stock at the top of the market. Assuming that the investor continues to make significant profits. He buys stocks at the peak. Almost immediately after buying shares, the company publishes a quarterly report. That shakes the confidence of investors and causes the stock value to decrease by more than 10% and never recover. The investor holds the stock at a loss and has no option to sell the stock.

Comments on the chainsaw pattern

Conversely, some investors, especially those who are short sellers, could face a chainsaw at the bottom of the market. For example, an investor might anticipate a recession and buy options on the S&P 500. If the market continues to decline, the investor will profit. However, almost immediately after buying put options, the market rises unexpectedly and the investor’s options quickly become “out of the money” or worthless. In this case, the chainsaw occurs in the recovery phase and the investor loses his investment.

Financial markets change suddenly. Many analysts are looking for models that explain the patterns in the market so that the investor can choose the right asset class. A study by Sonam Srivastava and Ritabrata Bhattacharyya, titled Evaluating the Basic Factors of a Dynamically Adaptive Systematic Trading Strategy, explains that stock patterns vary due to fundamental changes in macroeconomic variables, policies, or regulations.

The authors state that a trader should adapt his trading style to take advantage of the different stages in the stock markets. They also suggest that investors choose asset classes in different market regimes. To ensure a risk-adjusted return. However, different experts offer different recommendations

A chainsaw refers to any price movement that is in the opposite direction of the trader’s bets and often leads to losses or, if they can, prevent price fluctuations in order to preserve the investment and even make a profit. forex market)

Real world example

On December 6, 2018, CNBC reported that stocks had hit investors as news of worsening trade relations between the United States and China and the possibility of a slowdown in economic growth. The advice of experts is different.

To prevent volatility, one expert advised that investors should choose a long-term strategy. that match their strengths and follow that strategy regardless of chainsaw movements. In terms of investment, another expert recommended investing in more stable sectors such as healthcare and avoiding less stable sectors such as real estate. Most experts expected significant volatility in the short term. And one advised to take a defensive position. However, he also stated that a long-term portfolio based on stocks will win.