Simple Pattern Trading is the most effective way for a beginner to trade leveraged instruments like Forex and CFDs.
Focusing on one, two, three bar price patterns, and the most recent open, high, low and close data (OHLC) makes the process of trading easier than say traditional forms of technical analysis that monitor a large range of price data.
Because we’re dealing with only the most recent price action, this type of trading is effective and responsive to very short-term price trends.
With Simple Pattern Trading, we look at the hard right edge of the trading screen only, and analyse the market on a strict bar by bar basis.
Why Simple Pattern Trading is best for a beginner?
Below is a list of price patterns we look for in pattern trading, in brackets the number of sessions needed for the formation to occur.
- Harami Inside Bar (2 bars)
- Harami Pin Bar (2 bars)
- the fakey (3 bars)
- outside bar (2 bars)
- double inside bar (3 bars)
- fractal (5 bars)
- pivot high (3 bars)
- smash bar (1 bar)
- Ultimate Smash Bar (1 bar)
As you can see, with few price bars required it’s not difficult for the beginner to make sense of things.
Many charting techniques on the other hand, from trendlines, to support resistance, to classic chart formations all, require multiple price ranges that can stretch back months or even years.
This can prove problematic for two reasons:
- The beginner becomes overwhelmed with the sheer number of price points
- Discretion is involved in choosing which price points to use for connecting trendline or S&R, which can cause its own set of problems
In trading, simplicity is the ultimate sophistication.
The more discretion, data or entry criteria required within a system, the higher the chance of messing the process of trading altogether.
In Simple Pattern Trading, even setups such as the five bar fakey, are straight forward to master.
The aim of Tradeneophytes is to teach the beginner how to become an adept short-term swing trader, and to do so with as little complexity as possible.
What type of thing we are looking for
The best patterns trades happen on a daily timeframe.
They are short-term run ups and down in price, that can achieve decent returns in a handful of days.
SPT techniques also works well on an 8-hour, and even weekly timeframe.
Simple Pattern Trading is not suitable for timeframes of 4 hours or less, where other techniques are more effective.
Whichever timeframe you choose to work on, the job of a pattern trader is always the same.
That is, wait patiently for the latest price bar to complete.
And then to see how that bar relates to the previous price bars.
The diagram below shows four different price patterns:
These are the type of patterns you’ll be looking for day in day out as a short-term pattern trader.
Entry order levels
Once a price pattern has been confirmed the next step is placing an entry order.
We do this by placing an order a few pips above the high of the last bar if going long.
Or, a few pips below the low of the last bar if going short.
Below are Harami Inside Bar examples for trading both long and short.
Exiting a trade
There are generally two ways to close a trading position. Price target or trailing stop.
Price targets are pre-determined levels for taking profits.
The trade derives a price target either from a logical point on a chart, or from a given multiple of the risk allocated to the trade.
Trailing stop losses, on the other hand, are stops placed at a level above or below the current market price, depending on being long or short.
Some traders like to:
- place an initial stop loss
- then trail a stop loss
- exit on a price target
Other traders like to:
- place an initial stop loss
- trail a stop loss
- let the market stop you out
The Simple Pattern Trading trailing stop
I have a preference for letting the market take me out of a trade, rather than using the price target method.
Over the years I’ve seen many trailing stop strategies used, some of which are totally bizarre to me.
Often these methods include using a wide stop, in the hope of catching an extended trend.
More often than not though, wide stops do nothing more than give back huge chunks of open profits.
Not to mention, leaving the trader using them extremely frustrated.
Beginners need to hit the cash register on a regular basis – which is why I don’t advocate newbies start with trend trading.
Most beginners simply don’t have the patience to sit on a trade for too long.
The Simple Pattern Trading Exit is basic but always captures the meat of a short-term move.
It works by:
- placing a sell stop at the low of the most recently closed bar if long, and keep moving it up
- placing buy stop at the high of the most recently closed bar if short, and keep moving it down
The diagrams below gives you a better idea of this in action.
Simple Pattern Trading is the quickest way for a newbie to master trading; with minimal price bars and entry criteria involved pattern recognition becomes easy.
No need to spend excess time analysing what happened x number of days, or months ago. All the action you need to follow is happening at the hard right edge of the trading screen.
This makes it a very good fit for short-term trading.
Trailing stops are moved rapidly to lock in profits, meaning you capture the meat of most trades. And give back little open profit compared to trend trading techniques.
Keep reading Tradeneophytes blog, where I’ll dish out all my trading tips and the experience I’ve gained over the years.