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Patternrecognition

“Well, not everybody understands the patterns” Limitless 2011 In the movie Limitless (2011), Eddie Morra (Played by Bradley Cooper) takes a mysterious pill, NZT-48 , that turns him from a struggling writer to a financial wizard . The pill unleashes 100% of his cognitive power, transforming him into an intellectual powerhouse. About 40 minutes in, there is a scene. Hank: "Pattern recognition. That's your snake oil?" Eddie: "Well, not everybody understands the patterns." Why am I sharing this? Well, because not everybody understands the patterns, especially most traders. Did you know that chart patterns actually work? Not all patterns work, just some of them. Although there are numerous patterns in technical analysis books, many of them are actually snake oil. Take, for example, the Bull Flag; this is a Flag pattern occurring in an uptrend, usually during a bull market. The flag pattern is proven* to be snake oil; it is no more than a 50/50 chance of success. Only one flag pattern works; it is called a high tight flag* and works 85% of the time. The chart above (NVDA) is an example of one of the most accurate and successful patterns in technical analysis. The Inverse Head and Shoulders. The inverse head and shoulders is a well-known chart pattern. But how reliable is it? Based on thousands of tested trades from 1996 to 2020, it has an 89% success rate and an average price increase of 45%. Two decades of research* shows an inverse head and shoulders chart pattern has an 89% success rate for a reversal of an existing downtrend during a bull market. When this pattern works, it averages a price increase of 45%; this is one of the most reliable chart patterns. In fact, the NVIDIA chart above made 43% and has exceeded the target. Trading is a Game of Probabilities Trading is definitely a game of probability, but few traders understand the actual probability of each trade. Now that you know the inverse head and shoulders is 89% successful with an average upside of 45%; you can assess your risk/reward and make better trades. Sure, there is an 11% chance of failure and a lower-than-average price increase, but now you know the odds. Take TradingView's NZT-48 Pill In the movie Limitless, Eddie takes the NZT-48 pill and becomes a top trader. But did you know that TradingView is like the NZT-48 pill? How? Because the inverse head and shoulders pattern in NVIDIA (chart above) was discovered and annotated with TradingView's pattern recognition algorithms . TradingView does the hard work for you; it even sets the correct price target and lets you know when it is reached. If you are trading and not using TradingView's in-built pattern recognition, you are not utilizing the NZT-48 superpower. How to Turn On Pattern Recognition in TradingView Click Indicators > Technicals > Patterns Next, select the patterns you want.** I hope this was useful; if you like, hit like. If you want more, hit follow. Happy trading, traders! *Source: The Encyclopedia of Chart Patterns (2021 Wiley) by Tom Bulkowski **I would not recommend using the Pennant Patterns; they are proven not to work.
NASDAQ:NVDAEducation
by liberatedstocktrader
10
Documenting Your Trades (For Fun and Profit)How do you document your trades? In a spreadsheet? In a trading journal? Directly on the chart? How much is too much? How little is not enough? I say you need to document enough to tell the story properly. Every trade tells a story. As with all good stories you have a protagonist and an antagonist. Good guys and bad guys. The hero and the villain. And then, there's the journey. In the markets you are the hero and the market is the villain. One way I make trading "fun" and what helps me "tell the story of the trade" is to "Trade Like a Pirate" and use the vocabulary of Jack Sparrow. I have already written on this topic when it comes to analyzing profit targets (seizing treasure and plunder) but let's look at how we learn what we did on a trade by trade basis. When you do an after-the-trade analysis (what I call a postmortem) you should be able to see what you did right, what you could have done better, but most importantly, what you may have done wrong; not to beat yourself up, but to make sure that you *never* make that mistake or repeat that behavior again. (Fool me once, shame on you... fool me twice, shame on me!) For instance, I once lost three trades in a row and asked "How the heck did that happen?" and later when I looked at the actual trade screenshots I realized that both my trading timeframe and trend timeframe was the same! Somehow instead of having my charts on the 60-15 minute charts they were *both* 15 and I realized if I had my chart timeframes right I would have never entered those particular trades, saving me from experiencing those losing positions. Thanks to those trades, though, and thanks to my post-mortem analysis, the first item on my "pre-flight checklist" is now "Verify Trade Timeframes." Thanks to journaling and the postmortem process I'm *never* going to make *that* mistake again. But what about the *psychology* of the trade? *Why* did you enter it, *what* were you thinking once you were in it, *why* did you adjust your stop, *why* did you choose your target, *what* might you have done out of fear that got you out of the trade early or prevented you from realizing as much profit as you could have? Journaling your trade, or documenting the trade *properly* will help you with that. In the example above you can see a recent trade that presented itself to me and my pirate "Crew" in the Gasoline Futures market. I talk about the "weather conditions" before getting into the trade (the wind and the tide), other environmental factors like the "shark feeding frenzy area" helping me decide where I will target my profit (there be treasure *here*), what was going on when the trade actually entered, and finally, managing the trade to my target. In addition, during the postmortem I found an opportunity where if I had used a trailing stop, I could have gotten an additional 42% profit, or 'treasure'. As I mentioned in my Backtesting series, one of the reasons you backtest is that through repetition, you can often find patterns in your system that will prompt you to tweak it to either *improve* results or *eliminate* inefficiencies. In this same manner, through repetition in documenting your trades you may very well find a pattern of behavior that is holding you back from your full potential. For example, In the trade above, after securing 3R, (the minimum I am willing to take in a trade), if I followed price using my trailing stop strategy instead of a target, I found that I could have made an additional 2-3R profit. What if after documenting 20, 30, 40+ trades I find a similar pattern, that I am often "leaving money on the table"? I can then test several exit strategies to see which ones would give me the biggest bang for my buck and increase my R per trade. The other big benefit of having your trade journal "tell a story" rather than "state facts" is you begin to *personify* the market and see it as someone who exhibits certain behavior patterns, and that is what the markets present to us every day: PATTERNS. And if you can determine someone's patterns, you can predict their behavior. If I know that whenever my wife is browsing through a jewelry catalog and consistently goes "ooh" or "aah" over earrings with blue stones in them, I can guess with a high degree of accuracy that if I buy her a set of sapphire earrings she (and consequently*I*) will be a happy person. Likewise, if I can predict with a high degree what "Mister Market" is going to do based on certain patterns, I can keep setting sail, with confidence, day after day and see gains in my trading account (which makes me, my crew, and most importantly the missus, HAPPY! (Because when momma's happy, everybody's happy!). Trade well! (And Journal Well!) PS: Let me know how your journaling journey goes in the comments! I'd love to know how it "upped your trading game!" You can only improve what you analyze! -Anthony
NYMEX:RBF2021Education
by ocaptain
8