Past verses future markets
Trading is about profiting from market trends and finding price patterns that are likely to be repeated in future. Patterns are accumulations of price movement that have occurred repeatedly in the past. Finding reliable price patterns is the key to profiting from trading.
For example, we can observe that when the market rises in the New York time zone, there's a 70% chance it will move the same way the next day in Japan. Similarly, there's a high probability that the market will fall further when prices drop below the 10-period moving average.
Market patterns arise as traders make trading decisions based on past price movements. They examine price movements regularly seen in the past and use these patterns to build trading strategies.
The more traders believe in the same pattern, the more likely it is to continue. Understanding patterns used by other traders can help you to find profitable strategies. For example, if a market pattern used by many traders is about to be completed, you can anticipate when other traders will take a position. If you can enter before other traders push the price, that will make the trade even more profitable.
However, problems can arise if too many traders trade the same pattern. For example, when you're about to close out a profitable trade, but there are many traders with the same position, the price is at risk of moving quickly in the opposite direction at the same time as you try to execute because everyone is trying to do the same thing at the same time.
Once you've found a reliable pattern, you should analyse why it was profitable and consider how well it could perform in future. Also, look at the current market and ask the following questions: whether the pattern is a forward or reversal pattern, whether the market has been quiet or volatile in the past, whether any recent news has changed market sentiment, and so on.
Markets move for many reasons (news, technical indicators, sentiment, etc.), so predictions are never 100% accurate; risk management is essential as no pattern repeats itself 100% of the time. Accept that the market is constantly changing and use the stop-loss strategy in your plan. After a bad performance, it's essential to review your trading results, and whether the pattern you used was suitable for the market conditions. When you are considering a new trade based on a historical price pattern, always check if new economic data is about to be released or if the market direction or volatility has changed because of a breakdown in the trend. If so, you could then adjust our strategy if necessary.
As the market changes frequently, it's advantageous to have more than one trading pattern prepared. Then, when one no applies, you can switch to another pattern that better suits the current market. Look for more market patterns to improve your performance, and understand the results. Don't be disappointed by losses. Instead, use them as an opportunity to find new, more profitable patterns. Remember that a loss is not a loss, but a good base for the next good outcome.