Pattern Playing

Most traders who are successful have an edge, a method that they can return to when they need a score. I play patterns. I have found that given the binary nature of up or down many patterns of ups and downs repeat over and over again.

I use a pattern I call red-white-and buy quite successfully. One might call it my bread and butter pattern. This would be described simply as down-up-up. When I see this pattern in a chart I figure the next period or more is going to be up.

It is a little more complex than that as I always insist that volume, trend and 200-period moving average components meet my specifications too. For example, volume for the last 30 days must be greater than 250000 shares every day. The trend as shown by the 45-period linear regression slope must be positive and the latest close must be greater than the 200-period average. If the stock fails any of these basic tests I don't want to know about it.

I used to require a much stricter 1 million shares a day average for the past 90 days but I have found that to be overkill. If I were dealing in more than 1000 share lots I probably would go back to that requirement. I buy either 250, 500 or 1000 shares at a time. I may buy more than 1000 shares on a given trade but never on the same commission. I will sell up to 5000 shares at a time but have also sold 5000 shares 500 at a time.

I buy using limits and I sell using limits. My first ever trade was "at the market" and I will never do that again. Only because the "market" suddenly was 50 cents greater than it had been before or ever was again. One second after taking the trade I was down 50 cents a share and it never recovered.

The red-white-and buy or Down-up-up pattern works in any time period. But always keep in mind that nothing goes straight up nor straight down. Most of the time the stock market meanders sideways-up. Remember too that trading and investing are two entirely different things. A trader is always looking for a scalp and an investor is always looking for a dream. Sometimes dreams come true - most often they do not.