One of the most challenging aspects of trading is to recognize when you are losing. Being able to do this is an art, and so is recognizing patterns in your trading.
Just like people who keep diaries subconsciously recognize their patterns, so too will you if you keep records of your trades and trading options (regardless of whether it’s in an excel spreadsheet or not).
You have a trendline
The price meets trendline resistance and pulls back down again – a pullback that continues until the price reaches support at another trendline.
You have a double top. The price has formed two peaks which both live above a moving average, followed by a sharp drop off followed by a long wick showing buying pressure, showing a good entry point. You have a triple top.
The price has formed three distinct peaks roughly the same distance apart, followed by a sharp drop off followed by a long wick showing buying pressure, showing a good entry point.
You will often find people trying to call patterns in hindsight
You know, the old “I knew that was going to happen all along!” routine. The best way of combating this is to make your system as simple as possible – don’t try to fit every single pattern you see into your system (if you can help it).
Also, make sure whatever system you use allows for price variation; some days, the market is more conducive to range trading than others. Sometimes, it’s volatile and varies from minute to minute.
Profit targets and stop losses are also good indicators, as long as they fit the overall theme of a particular trade; sometimes, you may take profits early because your gut says it feels about right, and there’s no right or wrong answer here.
Another simple idea could be to trade only at market open (London session for those who don’t live in or near New York) / market close (New York session for those of us unlucky enough not to live in or near London).
The rationale behind it
The market has had time to cool off and merge after a volatile intraday trading session in the US. We’re still trading when there’s enough volume in the market but not so much volatility. I’m not saying you should always do this, but even applying these simple ideas could make a profound difference in how profitable your overall trading strategy becomes.
These are just a couple of examples; it’s up to you what you want from your trading strategy, whether it’s high-frequency scalp trading or long-term swing trades – all I hope is that you find a system that works for YOU and doesn’t rely on luck or instinct.
Instincts can help recognize patterns quickly, but if you can recognize patterns using something like a moving average. Trading isn’t about being right; it’s about being right more often than you are wrong – that means having a greater probability of success.
In conclusion
The best way to use this article is to reference, going back to it now and then when you’re thinking, “maybe I could try something new with my strategy”.
The most important thing is finding a system that doesn’t rely on instinct or sheer luck. As a software developer, I know how bad programmers are at estimating the probability of events occurring in their code – those estimates are often wildly inaccurate, so why should we be better at predicting things like the market?
It’s not just about making money either; there’s nothing more satisfying than having a well thought out plan and executing it perfectly time after time. Last but not least, have fun! Don’t see your trading as a chore; it’s FUN after all!