Many times I’m asked how or what it is I do when day trading. First, there is not a standard system of trading, meaning not everyone trades the same way. Everyone typically trades using a method they have either been taught or developed that they feel most comfortable with.
My method deals with chart pattern analysis, which entails looking at chart data and trying to find structured behavior that can be used to make accurate predictions on future market movement. Now looking at a typical chart of price movement looks fairly random, which presents the challenge of this task.
To paint a visual of what kind of work is involved, imagine you are from another planet visiting Earth for the first time. Now imagine you are viewing a screen showing the activity of a wide cross section of area in a large city, with the following twist- all you see are “blips” on a screen – no street names, or even streets. You don’t see any stop lights or traffic signals of any kind. You can’t even differentiate a “car” “blip” from a “person” or “animal” blip. All you see is a blank screen with all the “blips” moving about. Now consider taking on the task of monitoring the movements of these blips to figure out what “patterns” or “rules” are in effect directing movement so that you’ll be able to improve your chances of predicting future blip movement.
Remember, you have no preconceived knowledge of pedestrian or traffic laws in advance and are just trying to figure out what the rules are from watching how the blips move about. At first it would look like a random jumble of movement, making it hard to single out particular behavior rules. You basically have to “reverse engineer” where all the stop lights, streets, and traffic signs are located by observing behavior over time.
Now this challenge would be difficult by itself if everyone followed the “rules”, but we know in real like they don’t. People jaywalk and cross against lights, cars make illegal moves and park in unauthorized areas. In addition, emergency vehicles won’t be held back by stop lights or stop signs. So you begin to learn that the rules you seek to make can’t be absolute since there will invariably be exceptions, but should describe general behavior that takes place the majority of the time.
Analyzing market behavior in search of patterns is similar to this, where you have no rules or distinct markings to indicate how prices will move, and you have to create a set of guidelines on your own- no easy task for sure.
Now of course traders have created “cheat sheet” books with notes of patterns to look out for such as “head and shoulders” or “flags” to name a couple, but studying other people’s work isn’t the same as figuring it out on your own. It’s like traveling to a foreign country not knowing the language but having a book of quick foreign phrase translations- you won’t feel that comfortable or be that effective if that’s all you know.
Now again I want to say that not everyone engages in chart analysis in this manner, but I come from a technical background so I find approaching trading from a ground up technical perspective works best for me.