Why Pattern Recognition?
A few months ago I wrote a blog on the importance of having a strategy. The blog was well received and garnered a number of very valuable questions. The most valuable question that came up was with respects to pattern recognition. So why is pattern recognition so important? Because being able to recognize a high probability pattern is key to a trader’s overall success. It’s key because it helps build the case for a GOOD trade. Of course, there are a host of other things that must be taken into consideration when trading, but for now we’ll stay focused on trading patterns.
As you may know by now, my personal primary go-to strategy is day trading volatility. I’m not long or short bias. I simply look at key levels and high probability patterns. Based on all the variables being in my favour, I’ll put on a position. With that, there are only 2 patterns that I trade. Whether a position is long or short, I trade the same two patterns. The 2 patterns are relatively similar nature, cousins if you will, they are Flags and Triangles. Both the flag and the triangle are high probability patterns that have a better chance of following through vs head-faking you out. Of course, you must ensure that ALL of your variables are in place before you trade those patterns. With that said, there is a lot of value in both therefore those are the two patterns that I trade daily. For anyone that holds a Lifetime Membership with J. Lewis Trading they know that based on the content in the Video Library, all I do is trade those two patterns. It is still important to remember that there are a few other key factors that weigh in on my decision making before I buy or sell, BUT 9 times out of 10 I’m only trading 1 of 2 patterns. The Flag or the Triangle.
So, why is pattern recognition a key to being a successful and consistent trader? Simple, by only looking for a few high probability patterns ie. Flags and Triangles, you limit the possibility of taking random trades. Instead of asking the market questions and waiting on “stuff to trade”, patterns give you road map to tradable opportunities. By trading high probability patterns you’re tilting the scale in your favour. By making high probability trades with more upside than downside you are inevitable mitigating long term risk.
"Every day trader should have a checklist of things that must be present before heading into a position."
There are many steps that are taken prior to the market opening. When, and only when, ALL the “boxes have been checked” should one focus on looking for patterns of interest. My pre-trade check list and my high probability pattern(s) are the crux of my trading strategy. This is all important stuff! It’s important because if I don’t see a pattern that I like, or worse, my pre-trade check list hasn’t been fulfilled, I simply don’t trade. The point of a strategy is to be in the drivers seat when an opportunity comes your way. You should NEVER arbitrarily put on a position just to “see what happens”. NEVER! Having a viable trading strategy and a trading plan is your Core Competency as a trader. Your proven strategy is your bread and butter. Making 1 great trade and 10 poor trades doesn’t make you a trader. Keep this in mind most veteran traders with a winning strategy have a strategy because of a lot of testing. A ton of hard years behind them and a ton of experience which ONLY comes from trading the markets repeatedly. There is a process that every trader goes through before a trade. There is no easy road to success. As a Trading Mentor I can shorten the learning curve and walk you through the process but at the end of the day you’ll NEED to get comfortable with a trading strategy that you understand. There is a process that ever trader must embark on before becoming a top trader, and that is a none negotiable commitment to the fundamental understanding of your trading system. You must know what you’re looking to trade and why. Not knowing this can be a deadly mistake!