PATTERNS -- So These REALLY Work???

I have a quote that I put on my trading sheet each day for reinforcement:

"Repeated good entries ALWAYS wins".

You will hear time and again that its the exits that count. Yes, they are important, but if you trade a retracement system, any realistic version, and have some discipline, you will not lose.

Discipline is the key, and its more than a little tough.

Oh, ya need a decent sized account for your trading style as well.

Jay
 
Quote from Kermit:


I’ve only explored the principle behind using Fib Ratios, but do not yet feel comfortable or confident applying it in actual trades. So it is not part of my production system for analyzing patterns.

Kermit
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Kermit,

Tried emailing you, but I suppose you've had some negative experiences. Email me if you wish to discuss what you do,. It sounds similar to my approach.

Jay
 
Jayford,

Speaking for myself, I found it of great RELIEF when I finally gave up the use of indicators while following patterns. It eliminates "mixed" signals which causes indecision, frustration and hesitation.

A DISCIPLINED approach using patterns based on Fib. ratios has been the answer for me. I should also mention that the analysis of time as well as price provides great support for trading decisions as well.

al c.
 
people talk about CONSISTENCY all the time. CONSISTENCY is just another way of talking about WINS VS. LOSSES. What matters is EXPECTANCY.

How many times have you watched a football game and seen this scenario:

Team A and Team B are in the same league and have roughly the same talent level, but very different coaches and strategies.

Team A is a ball control team. 3 yards and a cloud of dust on most plays, break about 1 big play a game. Hardly ever give up a turnover. lots of first downs, long scoring drives. They score about 60% of the time they get the ball but lots of field goals. The defense is ok but not great, just like the offense. They are very consistent, they score about 21 pts a game on average, and give up about 17 pts a game on average, squeaking out wins. They have a hard time scoring unless they are inside the other teams 20 yard line and even then they often settle for field goals since the run defense tightens up on them. Still , they are 7-3, a winning season.

Team B is a drop back passing team. They have to punt about 40% of the time since their running game is not that good and the pass doesn't always work. They occassionally give up an interception. Their field goal kicker isn't that good and is rarely used. But they can score from anywhere on the field and often their scoring drives are less than 2 minutes long. Any given play can be a touchdown. They have just as many scoring drives as they do punts and turnovers combined, about 50% success rate every time they get the ball. When they win they tend to win big, they score 30 pts a game on average and give up 21.
They are 7-3 since they had some poor execution and too many turnovers in a couple games.

Team B will win most of the meetings between the two teams. Not because they are better in talent, but simply because they score more touchdowns, which is what matters. (I know there are exceptions to this like Tampa Bay winning the super bowl, but tampa only won the super bowl after Gruden gave them a passing game. )

In this analogy punts and turnovers are losing trades, field goals are small winning trades, touchdowns are big winners. The trader that scores the most "touchdowns" usually comes out ahead ( not always, usually ). "TEAM B" traders accept that mistakes and flukes WILL HAPPEN, and so they know they need big winners to save them in the long haul. When "TEAM A" traders make a mistake, they have pretty much lost the game unless they go for the hail mary pass which can wipe them out.
 
MondoTrader,

The way I refer to CONSISTENCY has nothing to do with wins and losses. It has to do with the CONSISTENT and disciplened application of a PROVEN methodology. By doing this, the probabilities will work in my favor over a series of trades.

I have found that having EXPECTATIONS of market action is a road to frustration. I prefer to simply watch for the patterns that I trade to develop with NO EXPECTATIONS of market movement.

al c.
 
I didn't say "EXPECTATIONS", I said "EXPECTATION" which is an important vocabulary word for traders. It has a specific meaning in the context of statistics.
 
Quote from MondoTrader:

I am assuming that you are consistent in following your strategy, what I am talking about is the strategy itself.
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Consistency; Apparently a word that has many meanings to traders who are precise in their thinking as is MondoTrader. A dictionary definition: "uniformity of behavior" or "agreement or harmony in parts or of different things".

MondoTrader, gave a brilliant analogy through his A and B football teams with win/loss records that were both 7 to 3 but how these teams arrived at those records was the distinction that leads to a statistical EDGE.

Mark Douglas in his book "Trading in The Zone" makes this point, "If your goal is to trade like a professional and be a consistent winner, then you must start form the premise that the solutions are in your mind and not in the market. Consistency is a state of mind that has at its core certain fundamental thinking strategies that are unique to trading."

Douglas further develops what is meant by the "EDGE' in trading. He points out that the casinos in Las Vegas have a statistical edge because of the way they have structured the rules of play. The longer you play against the "house" the more likely you are to lose at the game. The reason is the house has the Edge.

"What casino owners, experienced gamblers, and the BEST traders understand that the typical trader finds difficult to grasp is: Events that have probable outcomes can produce consistent results, if you can get the odds in your favor and there is a large enough sample size. The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling."

PATTERNS provide this EDGE. Patterns must first be identifiable, objectively that is. The pattern must be quantifiable to have any real validity. The pattern must frequently appear and recognized in time for the trader to evaluate and act upon it. The trader must have practiced the steps of pattern recognition to act upon what he sees, without emotion or fear coloring his judgement. Further he must trade what "he sees not what he believes". No market bias must enter into the equation.

Then the trader will have the EDGE! He will have gained a measurable entry and exit for the trade based on objective criteria applied to the pattern that he has recognized. Out what appears to be a "random walk" or chaos he "sees" order.

There are well defined steps to this process. A trader may learn these steps, apply the rules and be CONSISTENT. Now, I believe MondoTrader is not arguing this point. He instead questions whether or not the trading system is CONSISTENT. That is the question he puts forth and I can answer from my personal experience that some systems are and some are not. It is relatively simple to apply backtesting or hours of trading and chart review to establish the efficacy of a particular trading system. Most systems fail. Most systems are market dependant, meaning the system may work under some market conditions but not in others. For example a trend following system will not work unless there is a trend.

Patterns, once fully understood, objectively defined and carefully followed produce repeatable profitable results which will give the trader an Edge which will produce a high incidence of success. The traders who usually disagree with this simply do not understand how to grade the patterns and apply them successfully. This is usually because they have not spent sufficient time to the study.

From looking at the chart posted by alc in this thread my guess is that he is definitely utilizing patterns that offer a high probability of success. The reason I say this is that the pattern he shows in this chart is one that works successfully 70% of the time. Those who know the pattern will see it as a "Butterfly" pattern. (Named and identified by famed trader, Larry Pesavento.)

I am very pleased that this thread may have some "legs" on this forum since it probably will lead to a lot of very interesting and valuable information to many traders fortunate enough to read it. I again thank "alc" for starting it and I hope he will continue it. I had previously initiated a similar thread and had to end it -- here is hoping that we can in fact prove that this forum is designed for serious inquiry and sharing of ideas.

Thanks,

MACD


"Out of Chaos one may find Order..."
 
Quote from MondoTrader:

I am assuming that you are consistent in following your strategy, what I am talking about is the strategy itself.
More...


I must admit that my knowledge of statistical studies and methods is weak. But I can add a bit of information as to my interpretation of "Consistency" at least as I see it.

Yes, it does have to do with win/loss ratios. Yes, ones equity curve is also a big consideration, which is one of the points I believe you eluded to in your football analogy. Obviously frequent small wins as in field goals will not overcome the bigger, although less frequent, loses and again your football analogy is applicable. A team that excels at gaining small points through field goals but rarely scores a touchdown will no doubt have a losing overall record.

Consistency is addressed in depth in the excellent book by Mark Douglas "Trading in the Zone". "If your goal is to trade like a professional and be a CONSISTENT winner, then you must start from the premise that the solutions are in your mind and not in the market. Consistency is a state of mind that has at its core certain fundamental thinking strategies that are unique to trading."

The importance then as Douglas develops the concept of "consistency" is that it is important for the trader to believe that he/she has an EDGE in the market that puts the winning averages on the traders side. This must be more than a mere belief. The trader must apply his system repeatedly with the results proving that the system has a winning edge. Just like the casinos in Las Vegas, the house has the EDGE. Bring bushel baskets of money and try and beat them -- the house loves it. Obviously, statically the casinos have structured the rules of play so that the game is skewed in the favor of the house winning over time.

As traders we must have an EDGE, like the casinos. We must have a system that skews the odds in our favor. Such a system is then honed and practiced until the trader's belief in it is absolute. When the trader has operated the system over time and is convinced of his edge then he/she can trade without emotions and will thereby be CONSISTENT. Add proper rules of risk management and trade selection by evaluation of risk vs. reward and the trader will have the EDGE to make consistent profits.

Patterns that are objectively recognizable repeat frequently and thereby produce the result of consistency when the above dictums are followed. Patterns take the seemingly chaotic market and create predictable reliable, and statistically accountable order out of that chaos. I know that pattern traders can demonstrate and prove their EDGE.

I would believe that alc, who originally started this thread, is able to prove his edge.


MACD

"Out of Chaos comes Order"
 
Please forgive the above repeatition of posts.

According to the software the first post was not submitted and became "lost".

I then rewrote it and posted and hence the multiple posts on the same subject.

Sorry for that,


MACD
 
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