3 Problems with Trading Patterns
New traders are always trying to find the silver bullet when they begin trading. They want to make money quick and easy. They think, “Just tell me when to buy and when to sell. All I need is a winning pattern!” They think if I just find the right pattern and follow it correctly, buying and selling the right times, I’ll win every time! WRONG! Let me be clear, trading patterns work if they are part of a trading strategy or trading plan, but new traders tend to think a trading strategy and trading pattern are the same things. Here are the three reasons new traders should not trade patterns.
1. Encourages a Mindless Attitude
The number one reason new traders should not follow a trading pattern is that it encourages you to have a mindless attitude toward your trading. When you follow a trading pattern you are taking the trade strictly based on the fact that patterns repeat. You start thinking that be a successful trader you have to find the stock that matches your preferred pattern to win. You’d be better off coding an algorithm to trade for you.
Instead, you need to ask the right questions. Why is this stock up so much? Why is this stock down so much? Is there some news I need to know about? Where is the overhead resistance? Where is the support level? Knowledge is what gives you conviction to take a trade. Don’t fall into the trap of trading a pattern and having a mindless attitude.
2. Not Knowing When to Exit
Trading pattern graphics always show a ‘winning’ trade and don’t teach you when to exit the trade. What ends up happening is that your mind tells you the trade pattern is still going to work out even when it’s not and you to stay in a trade longer than you should.
There is a trader on YouTube who tracked low float penny stock that would pop up pre-market and then fade off all day. He called it the “Gap and Crap” strategy. He tracked these stocks and how they moved for a few months in excel and was even selling his research to subscribers.
The problem is that he put his faith in the mathematical success of his trading pattern and could not cut his losses. One day a low float stock popped up premarket and meet all the ‘criteria.’ He shorted the stock and did not cut losses when it went against him. Why? because he was trusting in his trading pattern and was sure that it would eventually crap. If you are a new trader, you need to have a strategy with clearly defined stops and follow them.
3. Makes a Trading Plan Useless
One of the most important things a stock trader should be doing is writing down a trading plan. If you don’t know how to create a trading plan I’ve written an article titled How to Create a Complete Trading Plan. If your trading plan is looking at stock charts to see if they follow a trading pattern, that is not a trading plan.
Most trading patterns require you to make very quick decisions about whether or not you should enter or exit. The trading plan gets thrown together in a few minutes and then almost immediately has to be executed. This is not a problem for someone who’s been trading stocks for a while but it’s very overwhelming to a new trader.
Instead of trading patterns, learn trading strategies. If you need help finding a good trading strategy I’ve written an article titled Simple Trading Strategies for New Traders.