Why I Like Pattern
Trading
SpiBandit™ and IndexTrader™ are short term 100% mechanical index trading systems. With clear and precise entry and exit rules they take advantage of repetitive patterns that occur around the world in major stock index futures markets.
If you haven't discovered pattern trading before, and decide to consider the SpiBandit™ or IndexTrader™ as your trading system, then I hope you'll learn to love pattern trading as much as I do.
Now there are three important reasons why I love pattern trading, they are,
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Simplicity,
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Excellent Market Indicator, and
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Diversification - less risk
1. Simplicity
Firstly, I love patterns due to their simplicity. You'll find that patterns do not dilute the power of price, like indicators do, which
are only derivatives. And unlike indicators there are NO PARAMETERS to adjust!
Patterns represent price in its original form and give, in my opinion, the clearest picture of what the market is doing. It is not a leading, or lagging indicator, but the actual "present" market.
In addition, it doesn't require a lot of effort to draw a price bar - it only requires the open, high, low and close.
So to me, price patterns are the cleanest and simplest form of market behaviour there is.
2. Excellent Market
Indicator
Secondly, prices are determined by crowd reaction, which simply makes markets an
expression of mass human behaviour. By understanding crowd psychology, I believe
one can develop profitable trading strategies.
Although markets change over time the "crowd's" reaction, or "our" reaction to markets, do not. Certainly, us humans have responded to fear, hope and greed in much the same way we have for centuries. You only have to look back at the Mississippi Money Mania, the South-Sea Bubble and Tulip Mania, and then compare them to our recent Internet Tech Boom and Bust, to realise that our human reactions to fear, hope and greed, DO NOT change over time.
By identifying simple repetitive patterns, we are in actual fact identifying repetitive "human behaviour". By understanding human behaviour we can anticipate future market direction.
I believe price patterns provide clear insights into how the market's psychology is balanced, and therefore, offers the trader a signpost to where the market may go - in the short term.
3. Diversification
And lastly, I love patterns because trading an individual pattern is like trading a single system.
Each pattern will have its own performance profile that includes its average profit and worst draw down.
Trading a collection of patterns is therefore the same as trading a collection of systems.
Now this is why I especially love pattern trading. Markets change as they go from trending to range trading modes, through short or extended bull and bear markets. Nothing stays the same. You must believe this if you are to survive in trading.
So in my opinion, trading a collection of patterns, or systems if you like, provides me with diversification as markets change. Individual patterns will inevitably experience bad stretches, and when they do, you'll find your other patterns will be doing O.K. making up for the loses incurred.
In addition IndexTrader™ provides added diversification through trading a basket of markets. Depending on the number of indices you decide to trade (SPI®, Hang Seng, FTSE, DAX or SP500?) given your account size, the more you add to your portfolio the more diversification you'll have.
So the more patterns and indices I trade, the more diversification there is, and the less risk I have!