Why I won't trade patterns

[ProfitTakgFool]

This could be a valid point. I've never done well trading them so you may be right, perhaps I just don't know how. I'll accept that.

When it comes to the stock market, or any financial market, everything is subjective and open for debate. One guys poison is another guys treasure.

This has been my experience with patterns, and the experience of about 90% of the people I've come across. That does leave 10%.

When I got serious about trading futures I picked some guys brain who had 15 years of experience. The first thing he told me, before he said anything else was, "Trading patterns is a bad idea." Well....I just couldn't agree more.

Quote from Anekdoten:

Maybe you just don't know how to trade them.

In fact, the chart you posted, I don't see a magic tick or a tick below the bar closing below the support line of the pennant.

Bad example to show to those that do know how to trade them.

Anek

 

[ProfitTakgFool]

This is the trigger, a short on a break of support.

Quote from Anekdoten:

Maybe you just don't know how to trade them.

In fact, the chart you posted, I don't see a magic tick or a tick below the bar closing below the support line of the pennant.

Bad example to show to those that do know how to trade them.

Anek

 

[FanOfFridays]

Quote from ProfitTakgFool:

Hypo,

Here's what worked for me. I don't know if you have ever studied statistics but stock market data looks like an F-distribution, or skewed left or right. Within that F-distribution there are normal distributions. The normal distributions can be traded, the trick is knowing how to find them. My strategy is this...find a normal distribution within the day and fade the number that goes in the tail, or the part that represents 2.5% of the data. Not by coincidence, that data just happens to be the move coming out of a pattern. So, hypothetically, my win rate should be about 95% (2 tails are 5%).

I wonder if you'd mind giving me a quick clarification here. I understand that you're fading moves which represent events out at the tails of the normal distribution.

1. So do you have a way of quantifying the actual values you are looking for (some sort of real-time scanner that you can start to monitor when you figure you're in the normal distro part of the day)?

Or is it that the patterning itself is evidence of the normal distribution forming up? Hmmm... maybe this is it. Aha....

2. I'm not quite sure I get how you're finding the numbers that go in the tails in the moves coming out of a pattern. So you mean that regardless of which way prices tend to break out of the pattern (the pattern, which is evidence of the intraday formation of a normal distribution of price) you tend to fade it?

As I'm typing this I think I'm figuring it out a bit better. Is this an accurate summary?

Prices move randomly for most of the day, with isolated pockets of normally distributed values. 'Patterns' can (do? sometimes do? are the only things that do?) indicate these areas of normal distribution. Large moves out of these patterns are faded. The entry point is determined by...

(a statistical value, i.e. deviation from intraday mean? that combined with approaches to S & R?)

Thanks in advance, hope this isn't asking for too much detail. As you can tell, I did not take 'sadistics' in Uni.

 

[FanOfFridays]

Quote from ProfitTakgFool:

This is the trigger, a short on a break of support.

Damn, this tends to contradict what I thought you were saying. I thought you were saying that the pattern was the isolated instance of normally distributed price and that you would fade a big move out of it. This post, though, seem to indicate that you would go short on a breach of the support line as opposed to going long after a strong downmove out of a pattern like this (fading the move). In this case, I don't see how this event (breach) represents the 5% tail events you said you traded.

Probably my problem here is a lack of sadistics, or more accurately, probability theory.

Quote from ProfitTakgFool:

My strategy is this...find a normal distribution within the day and fade the number that goes in the tail, or the part that represents 2.5% of the data. Not by coincidence, that data just happens to be the move coming out of a pattern.

Fade the number?? Hmmm... fade the move, fade the number. Maybe this is why I am not catching on.

 

[whitster]

"The stock market is nothing more than a random number generator and random number generators do, in fact, create patterns."

where is your evidence that it is random?

it is not ime and based on my studies.

chaotic? yes. often inscrutable ? yes

random?

no

 

[Dustin]

Quote from Dustin:

IMO you are missing a key component to the concept. Without a catalyst to propel the stock once it breaks then the strategy just isn't worth much. I know you are a futures trader, but follow me...

Look at this ABK chart I attached. Really weak today. Descending triangle. Easy short entry with a tight stop. But, if it breaks down (I would say 60/40 chance) then there is a lot more downside possible, then there is risk of loss if it breaks upward.

That is why the catalyst is important. Without it you can find chart patterns anywhere that won't have the volume or trading interest necessary to provide you the odds needed to take the trade. That's why I only trade stocks with higher than average volume. Futures traders don't really have that option, which is one reason I don't trade them.

This setup ended up being one of my best trades today...but alas no comments.

 

[twofacedjoker]

This is why I flip a coin.. Two Face did it!

 

[cokes]

Quote from ProfitTakgFool:

It all comes down to risk management more than anything.--------->>>> Now this is where we agree. How you manage risk and how you manage your account are most important.

The only common element I have observed in every successful trader is disciplined risk management. One guy might trade off charts another throws darts, but ALL successful traders manage their trades/account in a disciplined manner.

Cokes

 

[Anekdoten]

Quote from ProfitTakgFool:

This is the trigger, a short on a break of support.

The closing bar alone is not enough.

You need a tick below the low of the bar closing below support.

In other words, a lower low after the so called "trigger".

Anek

 

[NihabaAshi]

Quote from ProfitTakgFool:

It's not my intention to criticize people who trade patterns, just to share my experience with you why personally will not.

This chart sets up as a simple pennant. One guy will look at this chart and say buy a breakout up because the bottom is in and we are going to breakout from a higher low -- that's bullish!

The next guy will say, heck no, the market is weak, it's gonna break support and head lower -- that's bearish...

You've described a perfect example of why I will continue saying to other traders that just because you see a pattern...

That doesn't imply it's a trade signal.

Simply, your chart represent a simple pattern but it does not represent a trade signal.

Thus, pennants are not trade signals all by themselves and that's the reason why traders as you will struggle with them.

Therefore, a pattern should only be used to alert you to be prepared to trade because a trade signal may appear.

In addition, a price action does not merit a trade unless you understand the price action prior to the appearance of any patterns or trade signals.

My point...there is distinct difference between patterns and trade signals.

For example, that pennant pattern you show...

The actual trade signal involves the trendline break.

Therefore, the main issue here are trendline breaks.

Are trendline breaks to the downside reliable after a Higher Low price action in comparison to trendline breaks to the downside after a Lower Low price action???

Are trendline breaks to the downside reliable when the breakout occurs at/near a key support level???

My point is that the pennant itself is not your problem.

Your problem is that you need to learn more about trendline breakouts and support/resistance levels or zones.

There's a lot of stuff occurring on your chart example and the pennant was just a clue or warning to be prepared to trade...

Profitable traders saw more than just a pennant and trendline break.

Long or Short depending upon your trade signal.

That's the reason why different traders will trade your pennant example differently...

Mainly due to the fact that they are using a different trade signal.

One guy goes Short and another guy goes Long upon seeing that trendline break below the pennant.

Same pennant...different trade signal.

Successful trading involves many chapters of the book called Profitable Trading.

There's one chapter in that book called Patterns and another chapter in the same book called Trade Signals (a.k.a. entry signals).

Quote from ProfitTakgFool:

Right on IronFist. My win rate on patterns was about.....you guessed it....25%. So, I started fading them and my win jumped. This was one of the ways I evolved as a trader. Everyone has to find what works and what doesn't, make adjustments, and find their groove.

Your next statement above implies you actually do trade patterns.

In fact, you stating that you fade patterns.

Just keep in mind via using your example...

You are now implying you would have faded that trendline break to the downside via going Long instead of Short.

Essentially, the pennant was your alert and the fading of the trendline break is your trade signal although I'm sure there's other things involved in that trade decision.

Regardless, you do use patterns as part of your trade methodology via fading them.

Mark