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Chart Pattern Recognition – The Secret Art Of Flipping A Coin

Technical Analysis can be a confusing topic for many traders. With a large array of indicators to back test, for many traders, after all that work, they realize that no indicator really will consistently and convincingly let you be right more than maybe 4 or 5 times out of 10

The other side of the coin is that, the nature of reality is chaotic. I refer back to the pareto principle which states that reality and the course of events occur in a random and "stacked" fashion. They will not be even spaced in a neat and predictable way. That 4 or 5 out of 10 system may be wrong 20 or 30 or even 40 times in a row, then suddenly you will get a streak of winners.

This type of behavior can be psychologically painful for many traders and typically the temptation is to cut corners or tweak the system mid flight. Essentially to be a good trader, you need discipline. Of course, you need a good and reliable system first. But essentially it will be your money management that will be responsible for your wealth and income.

If you can resist changing things and second guessing your system when that inevitable streak of losers comes along, you will get your money back providing your stops are small and your wins are large. The real danger occurs in the following scenario (and believe me, I know, I have done it to myself several times)

You get many losers in a row. You are feeling your incredible and exciting gains disappearing before your eyes. Every day for 2 weeks you experience nothing but losses. Then the wins come back, so you throw away all your discipline and trade big to try and recoup your losses fast. The losers return, but you keep your trades big, knowing in your heart the market owes you, and at this point all you are doing is gambling. The large trades stop you out to the tune of 10 stop losses of value per trade. Your account dwindles miserably. You finally quit being so cavalier and go back to your original trading system, only now, following your own rules, the trades are tiny and of course thats when the winners come back strong.

What do you do? Be cavalier again? Or stick to your system trade sizes. Of course you do, you're whipped, you took a nasty beating and now you are humble again. Of course now you are behind 15 weeks of trading effort and basically starting again. Technical analysis is only part of the story.


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