Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.
I frequently get emails from new traders wondering how to get the time to ‘watch their trades all day’. This is generally not necessary for swing trading, and in fact may lead to over trading and poor decision making. All of the testing I have done is based on end of day data, with entries being done at the open the day following the pattern trigger, and a number of trading systems show interesting results using this approach. The patterns discussed in my two books were tested on end of day data, and did not require any monitoring of positions during the day. I am trading patterns, not hunches or the latest ‘expert opinion’ on CNBC. I used to have CNBC on most of the time, but I found my trading improved when I turned it off and focused on the trading patterns and the market conditions rather than ‘news’, press releases, ‘experts’, and so on. Each pattern either works or it doesn’t. The idea is to find patterns with a statistical edge, then trade them in appropriate market conditions using appropriate money management techniques. There is no way to know if any particular trade will be profitable, there are no magic indicators or secret techniques that tell you if a specific trade will work. Each trade has a certain probability of working, some will work and some will not. Trading is a statistical business where I want to know the odds of a particular pattern working in a particular market condition, and then use this information to be positioned to profit if the market or the stock follows the most likely path. To do otherwise makes little sense.