Why I won't trade patterns

Discussion in 'Index Futures' started by ProfitTakgFool, Dec 28, 2007.

  1. It's not my intention to criticize people who trade patterns, just to share my experience with you why <b>I</p> 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.

    So there is dilemma one -- which way will it break? The odds are 50/50.

    Dilemma two -- the odds of the next tick being higher or lower is also 50/50. If you combine the two probabilities you are looking at a strategy that has a, best case, 25% win rate. .50 x .50 = .25.

    The guy who took this short has a nice loss. Had it broken up the same thing could have happened.

    If you guys are winning trading patterns, more power to you. I won't touch them with a ten foot pole.

    If you are <i>not</i> winning on patterns ask yourself... why would I choose to trade a strategy that has a probability of winning that is approximately 25%?
  2. Crap, messed up on the bold font.
  3. No set up is 100%. You put the trade on and set your target and stop loss and trade them consistently whatever your set up is.

    Showing us a losing trade is not a good enough reason to tear it down. It is possible it is not something you feel comfortable trading which is fine. I do trade patterns and when I get stopped out I move on. I do not expect 100% winners so a losing trade does not mean I abandon my whole set up and system cause if that is the criteria you will never find a set up or system that works for you.

    Your chart shows a consolidating triangle after a move lower. It broke out on a fake reversal but the loss is limtied if you know where to set up your stop loss. So you cannot say it was a big loss for a short unless they were blind to simply sit there and watch it move against them. These patterns have defined stop losses so when they fail you get out, not just sit there and watch it run against you mercilessly.

    I think on the position you showed the max loss would have been maybe 2 points but the target would have been about 4 points or so which is a nice r:r ratio. 2 points is reasonable loss trading any set up. I do not think this example backs up your complaints but again, I am not trying to convince you to trade patterns, but maybe if you are curious, look at them with an open mind to see if you do find something you l ike.
  4. No doubt the losses are limited, at least hopefully they are.

    If you are winning trading this method then it speaks very highly of your trading skill because from a mathematical standpoint, it's a losing strategy. It does not surprise me that some people can make money trading patterns but I don't see how it's possible. I guess I've been poisoned by all thos statistics classes I took :confused:

  5. 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.
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  6. If that were the sum total of analytics on my chart I wouldn't trade patterns either.
  7. Hypo, I see you've been around a long time. Care to share your views. What other variables are you looking at to get your edge?

  8. Don't confuse persistence with success.

    I presume you put that long ma on the chart to indicate major S/R. If so, why would you ignore it in taking that trade?
  9. <i>"The guy who took this short has a nice loss. Had it broken up the same thing could have happened.

    If you guys are winning trading patterns, more power to you. I won't touch them with a ten foot pole."</i>

    That specific pattern would have been much better odds if it consolidated after the initial break lower this morning. Price action had already broken, coiled sideways and broke lower in measured fashion.

    The wedge you drew had plenty of attention from traders watching it. Price action broke lower and ushered them in. It then posted a potential double bottom and came back up again. If short, stop trailed to entry = par resulted in nil loss. That's trading.

    Aggressive buy signal right at 1483 first and then back above the pattern (classic "oops" setup) were the next choices.

    Patterns tell a lot about what price action is probable to do. Learn to speak their language... you'll change your mind.
  10. I just use the MA's as directional indicators. The 25 ma (the longer one) is just the 5 MA on the 5 min chart. I don't use them as triggers, just noise filters.

    #10     Dec 28, 2007