Deconstructing the pattern will help you grasp what specifically were looking for in the pattern in terms of highs, lows, and sentiment or corresponding news releases.
Secondly, were going to discuss pattern selection, which is going to nail down what is most important to being a competent pattern trader. As with most things, there is an 80 – 20 rule where as 20% of what you learn here will provide 80% of the results. In other words, there are a few key components that we must select to focus on to decide whether a pattern is worth trading. Advanced selection will help you decipher what is important versus what is not important. While this may sound simple I can tell you from many years of live trading experience as well as discussing trading in real time with traders every week that a lot of traders unintentionally as opposed to more important ideas, which we will discuss.
Third, were to take a look at sequencing in order to help us put the process in the right order. Just like any good cooking recipe if you do not follow the right order or sequence then your process can be thrown off mark.
It may feel like were skipping some parts but in relation to the selection criteria mentioned earlier, we will skip over less important components that do not affect the overall pattern and likely subsequent move that were going to be focusing on trading.
Lastly, were going to look at trading risk and where a trade has gone wrong. It may help you to know up front that the absolute cleanest patterns you’ll ever see often do not work out. The reason they do not work out has less to do with the price pattern and more to do with the subsequent patterns we discussed in the selection component. Where many traders, including myself, have to fight the mental giant of greed is when you recognize a clean pattern, enter a trade based on that pattern, and then when the price starts to move against your expectation you hold on believing that the pattern will eventually play itself out. Of course, the market does not have to do anything and sometimes failed patterns provide stronger moves against the anticipated direction of the pattern so that fighting the new move on a failed pattern becomes very costly.
A helpful mental tip is to recognize how high the stakes become for failure when you hold a losing trade. High stakes effectively means that your risk of run increases significantly when you either over leverage or light a losing trade take more from you then you should allow any trade to take from you.
Prediction and elections module: how did Nate Silver predict 50 out of 50 states correctly in the 2012 U.S. presidential election, and 49 out of 50 correctly in the 2008 election? How much of that was luck? We will discuss how to find, process, combine, visualize, simulate, and summarize election-related data and questions, especially if there are conflicting polls with different reliabilities.
We hope this process of deconstructing the pattern, selecting what’s important to focus on most often, setting up a sequential process of what to focus on when, and recognizing the harm you are doing to yourself and your accounts future by failing to practice money management allows you to get the most out of pattern trading.