Introduction: Why Seeing Patterns Alone Is no more than a start point

Many traders begin their journey by being taught and then noticing visual patterns on charts such as a two-bar reversal, a classic triangle, double top or maybe a series of wicks that seem to regularly signal a turning point. These patterns often look compelling, especially when they seem to appear just before a major price move.

But here’s the catch, once we spot a pattern of interest we subsequently look for it, a little bit of confirmation bias may creep in so we ignore those times it may not work, and so in real terms when looking for positive technically moves at this stage arguably at best it can be described as an interesting chart story rather than a robust strategy,

And yet for many, seeing some examples of where things looked exciting appears to be enough to start to trade this idea, more commonly than not, resulting in outcomes which fall short of what we hope they may be.

The reality is that unless the pattern can be clearly and unambiguously defined, then tested, and of course applied and reviewed consistently, it is likely to remain in the “may have potential category. “

So, encouraging you as a trader to seek out potential repeatable patterns that may be technically interesting, there is a process, a roadmap to turn this idea into something that may prove to be more than this and something that could result in a robust trading strategy,

Pattern Recognition vs. Pattern Reliability

For humans (and I assume most of you are), pattern recognition is in-built, it is how our brains are wired, and we have an ability to find shapes, rhythms, and familiar sequences. But of course, sometimes markets are unclear, full of noise, and constantly shifting by varying degrees and for an uncertain period. So, what may appear to be a potentially reliable pattern may just be a random formation if not taken to the next level of analysis.

Add to that the potential for previously mentioned confirmation bias, and the potential for recency to be viewed as important, e.g. this pattern worked last week”, this compounds the difficulties in turning this into something meaningful. So, without downplaying the merit in further exploration, if you are interested in developing a strategy around this, then we, as traders, must move beyond recognition to verification, creating clarity and measurable criteria not only for set-up but the WHOLE strategy is essential.

Define It or Ditch It — The Power of Objective Criteria

It is worth emphasising that the objective here is to have something that not only gives great results over time but MUST be created in a way that facilitates consistent trading action, only then can you be sure that it is repeatable. The first step in this is to move towards clearly defining your trading setup. You must remove any grey areas, which will appear more so in the heat of the market action. Every part of it needs to be translated into specific rules. To give the critical parts and examples, it could look something like this:

• Entry trigger (e.g., a bullish engulfing candle with increased volume)
• Confirmation filter (e.g., trend direction or volatility band breakout)
• Context filter (e.g., session time or support/resistance proximity)
• Exit condition (e.g., 2:1 reward-to-risk, opposite signal, or time-based)
• Risk management (e.g., fixed fractional, ATR stop, position sizing)

That is the start … but then you must dive deeper, striving for increased objectivity as the more you do so, you are not only enabling you to achieve consistency, but later it is easier to refine SPECIFIC parts that can make things even better.

For example, instead of loosely saying, “a bullish engulfing candle,” define it as thoroughly as you can with context:

• A candle whose body fully engulfs the previous one on the candle’s close
• Appears after three consecutive bearish candles.
• Must close in the top third of the bar range.
• Accompanied by a volume bar higher than the two previous ones.

Now do the same for every other part of your strategy.

Now you have not only a setup but more importantly, a roadmap about what to do for EVERY part of the life of the trade. Something that can be traded with absolute consistency, reviewed, and arguably more easily traded with discipline, as in the market, you have absolute clarity and what you are doing and when.

Failure Detection

OF course, for those interested, there are increasingly sophisticated methods to test your new system. You can turn it into an automated strategy (even if you still intend to trade it on a discretionary basis) and use formal strategy testers or code to run your system on historical data. Fortunately, manual testing is still as effective, but it is worth emphasising a few key points of good practice.

The goal of this process is principled observation over sufficient time:

1. Observe Across Market Conditions
   Watch how your setup performs in different environments. Compare what happens (both when it works and doesn’t work so well) in ranging vs. trending markets, high vs. low volatility, before and after news events.
2. Tag and Journal Trades
   Use a spreadsheet or journal to track setup and full system behaviour. Note the time, direction, context, and whether the trade won or lost. Include tags that can be recorded in columns such as “against trend” or “news overlap” to spot weak periods, as well as the strong ones. This will help refine any filters you are using for entry.
3. Track Missed Opportunities
   Arguably, it is equally important to not just journal the trades you take. Note the ones you didn’t take also (for whatever reason, e.g. you were sleeping) and treat them as important as any live trades, as they do add to the weight of evidence. (although the latter, of course, adds the extra important variable of being able to track whether you were disciplined in execution).  Were you consistent in your application?
4. Ask “What Broke It?”
   When a trade fails, identify why this may have e.g. been it in the setup itself? Is there a filter you could have considered that would avoid similar future events?  Was there something in the market that may have given clues?

It is VITAL in your evaluation to remember that a losing trade isn’t necessarily a failed setup. A failed setup does not behave as expected, even when you have applied it correctly.

Measuring the Edge – The Numbers are your Friend

You don’t need advanced statistics to understand whether your new strategy is likely to hold water or not. These key numbers should not only be your justification for taking your strategy into the market but also the basis for ongoing evaluation to be able to assess and adjust as necessary. Basic metrics can give you a strong signal:

• Win rate: How many trades out of 10 are winners/losers?
• Average R-multiple: Are your winners larger than losers compared to the risk you are taking?
• Results Expectancy: (Win% x Avg Win) – (Loss% x Avg Loss)
• Maximum balance drawdown and trade streaks: How tough is the worst stretch, and how good is your best one, i.e. consecutive wins and losses. When we refer to drawdown, this is from the high point of your equity to its worst pullback, NOT your account start point.

You can build this evaluation process over time, record on a spreadsheet and move to 20-30 trades and beyond.  Ask questions of the data you have, and you may start to notice things like:

• What times of day may be good or bad, e.g. market open
• It fails more often in range-bound markets.
• One or two big wins contribute 70% of profits.

And then there is you…

So, let’s assume we have neutralised the demons of recency and confirmation bias in our system development and successfully created a system that looks as though it may create some positive trading outcomes going forward. It is then that the major mindset work begins.

Even a strong strategy is weakened considerably if it’s not executed well. Many systems fail because traders lack the consistency to quite simply follow the plan.

You may find yourself quitting after a small losing streak, overriding the system after a big win (or fear of missing out on something even bigger). Skipping trades due to hesitation or distraction will also impact execution.

To make it clear.

Without full execution, you can’t measure the success or otherwise of your system or make evidence-based judgements on what could make it even better. So, as close to 100% compliance is always the aim (and if you do stray, you will have to remove those results from an analysis you do, of course).

And finally, the great news is that on the other side, having done the hard yards of follow through, and seen positive outcomes, the belief that is created in your system because you have the evidence, is much easier to continue with the discipline you need to.

Final thoughts … Repeatability is the Real Edge in Your Strategies

What we are trying to achieve in this article is to give you a guide to moving from seeing patterns to making a profit. The only way to stack the odds in your favour and develop what many term “an edge” in your trading is by having and following a process you can trust.

There are no shortcuts, but definable steps you must take, through defining your setup and whole strategy, test it, track its behaviour on an ongoing basis, and apply it with discipline, you create something potentially meaningful, and importantly, it is a fit for you as a trader.

Yes, there is work, but I hope I have been able to stress the importance and potential benefits of doing the right things from start to finish.

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