The summary of the concept of trading the financial market is that trading is basically a pattern recognition game.
The price of a trading instrument is always in a constant and continuous flow of ups, downs and sideways movements.
The duty of the trader is to identify patterns or movement in price ( also called price action) that repeat themselves over time in the market.
These patterns/price actions don’t tell us EXACTLY what the market will do next but they signify that there is a higher PROBABILITY of one thing happening over another.
Now, there are many different patterns/price actions that a trader can learn and formulate a trading strategy around.
For example, today morning (30/10/2020) I sighted this double bottom~W~ pattern on GBPUSD. (see picture 1)
A ~W~ pattern formed around a key area of price support signals that there is a HIGHER PROBABILITY of price going up than price going down.
I used the phrase ‘higher probability’ because there is no guarantee that this particular pattern will play out as expected. However, I know that if I trade a large enough sample of this same pattern over a period of time, there is a very high chance that I will end up with more winning trades than losing trades.
Nevertheless, there is no way for me to be able to know in advance which of my trades will be winners and which of them will be losers. Hence, it will be economically disastrous and emotionally unsettling to risk too much of my trading equity on any particular trade.
Back to my example in picture 1, the trade eventually played out nicely and hit my take profit objective (see picture 2). But all along, the probability of a loss was also present such that if the pattern/price action had failed, I would have ended up with a predetermined loss.
In closing, trading the markets is a zero-sum game and loses are inevitable.
Traders who win over the long haul are those who are constantly forcing their minds to think in probabilities thereby circumventing the emotions of fear and greed that cause other traders to make trading errors.
What chart patterns or price action do you look out for in your trading. Please comment below.
My name is Ken Akure. I’m a resilient human. I trade FX and Crypto. I teach and write about trading. I’m fascinated by how much the concept of trading intersects with key areas of human existence.
