If you’re new to pattern recognition trading, it helps to have a strong understanding of basic patterns and their fundamentals. Understanding patterns and the technical drivers behind them makes it easier to recognize and anticipate them. That said, skill in learning how to trade against patterns comes with time and practice. 

Using pattern recognition trading

No-Risk and Low-Risk Pattern Recognition Trading

For beginners, it’s best to put yourself in a position where you can focus on learning pattern trading without worrying about tracking gains or losses. 

The no-risk approach to pattern recognition trading is to use a paper trader and track securities you’re interested in. Paper traders are applications that mimic the exact behavior of the market and allow you to trade normally. However, you’re playing with “Monopoly money.” There are zero real dollars invested in paper trading – it’s a system used by beginners to learn the basics. 

If you’re familiar with the market and want to dip your toes into the world of pattern recognition trading, delegate some “mad money” you can afford to lose. If you set proper stop-losses and are astute at recognizing patterns, this is a low-risk way to dabble in day trading. It might even be a lucrative foray!

Beginner Tips for Pattern Traders

Once you’ve got some practice under your belt, start combing through securities with strong volume to find movers and shakers that may be developing patterns. Keep in mind that some patterns manifest intraday, while others can take weeks or months to pan out. As you’re looking, keep these tips in mind:

  • Always look for four touchpoints when defining a pattern. These points usually take an ABCD form, with two points of support and two points of resistance. Start extrapolating patterns only after they mark four or more points in a trend. 
  • Get familiar with the Fibonacci Pattern and the Golden Ratio and use these in your pattern analysis. The closer a pattern is to these benchmarks, the more reliable it tends to be –and the more predictable.
  • Always look at the fundamentals behind your pattern, such as volume and moving averages. Quantifiable security data provides context for technical analysis, which lends credence to important actions like stop-loss setting or target prices.
  • Understand the bullish and bearish behaviors within patterns. They’ll influence how a stock behaves at the point of action within a pattern. This is why it’s also important to define continuation patterns vs. breaking or corrective patterns.
  • Be as non-subjective as possible when evaluating patterns. Avoid what your gut thinks and be as technical as possible with the trend. Patterns are there for a reason: They illustrate proven behaviors. Stay on-trend!
  • In addition to these pattern-specific tips for beginners, also remember that pattern trading isn’t a sure thing. Anomalies happen and the stock market is known for being irrational in the face of logic. Observe patterns for what they are: indicators, not laws.

Step-By-Step Action for Pattern Recognition Trading

It takes time to get comfortable identifying and acting on patterns. With enough practice and adherence to best practices, day traders can expect to become more accurate – and hopefully more lucrative! Eventually, the process should distill down to something like this:

  1. Identify and qualify a price trend
  2. Understand the context of the pattern
  3. Determine if it’s bullish or bearish
  4. Establish stop-loss and target price levels
  5. Engage in non-subjective trading.

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At the end of the day, remember not to get greedy. It’s easy for new traders to get caught up in the adrenaline rush of correctly predicting a stock. And many attempt to ride their gains. Stick to your strategy and enter or exit your positions with confidence at the levels you’ve established. You may not always ride the trend to its highest or lowest point, but you’ll gain more than you lose by sticking to pattern recognition trading.