Beat The Market – Chart Patterns & Probabilities

Many people try and beat the market, and they come up short.  The only thing they walk away with is less money and the burning question: how to beat the market?  The potential of vast fortunes lures in many.  But, to be the market, you need to gain some kind of advantage.  Knowledge is key to this.  As a former FX Trader where I cut my teeth, I have looked at nearly every nook & cranny of opportunity to gain an advantage.  Applying my education in both Economics (Macro-Economics) & Applied Mathematics (Statistics), I found some repeating chart patterns that I found to be very beneficial as trading patterns to trade.  I applied probabilities to these chart patterns and found that the trading patterns could provide information.

Over many years of trading in the market, I have found a few indicators that can increase the probabilities of success.  One simple thing is to understand that there are certain market biases, and one of the biggest biases is the tendency of any market to move upwards more than it moves downwards.  But, there are also many caveats to this.

Probabilities & FX Chart Patterns

Trading chart patterns is the realm of technical analysis.  If you have been following me & my content for any length of time you know that I put almost zero efficacy into technical analysis.  In fact, the Technical Analysis Bible has the best technical indicators only achieving about 35% probability of success after having tested thousands of charts. That is no way to try and beat the market.

Given that low of a statistical probability of success, 35%, let me know what every single trade you are about to put on and I will take the opposite side every single time.  That amounts to an approximate 65% success rate for me.  But, that means you are going to be unsuccessful 65% of the time.  Trading chart patterns, by and large, does not consistently lead to successful trades.  And, when I was evaluating FX chart patterns regularly, I often could find problems in trading technical analysis and chart patterns.

Beat The Market: Probabilities & Trading

  • S&P 500 Chart 2010

What I did find was a methodology that really made me become very pragmatic in trading chart patterns.  I found probabilities to be one of the most effective tools out there for trading FX Chart patterns.  The one thing I found was that there were very consistent consistent chart patterns I could observe with almost any of the chart patterns I could find, and this really helped me to beat the market.

What I found was that with FX chart patterns, there were percentages that were almost 100% identical in everything I looked at.  I found that for any day chart I looked at, the chart patterns were consistent across the board and, this is how I consistently started to beat the market.

I found that 50% of the time, chart patterns showed up that showed a market closed higher one day versus the next.  And, 2.5% the trading patterns would close at the same price, whereas 47.5% of the time, trading patterns showed prices closed lower the next day.

No matter what trading patterns I looked at, I could consistently find that the the numbers were always there.  No matter what currencies I looked at, whether it was a USD rate or a cross rate, no matter the timeframe, the percentages were the same.  Learning this is exactly what it took for me to learn how to beat the market.

FX Chart Patterns & Time

Another thing I observed is that the timeframes were consistent, also.  With FX chart patterns, if I looked at 1-day closing prices, 1-week closing prices, or 1-month closing prices, the percentages were exactly the same across the board.  Having this knowledge lead me to beat the market more consistently, and there were several reasons why.

First, when it comes to FX, currencies do not necessarily move upwards over time like stocks do.  FX currencies are commodities that are bound by supply and demand, Banana Republic-style currencies notwithstanding.  So, FX trading is all about predicting the bounds by which currencies moved within.

Stock Trading Patterns Differences

But, stock patterns are different; they generally trend upwards over many years.  So, applying my probabilities to stocks was slightly different.  What I found in these trading patterns was actually easier to determine.

First, over the short-term, whether I was looking at the S&P 500, or an individual stock, the numbers were consistently the same from one day to the next: 55% of the time, the chart patterns were positive from one day to the next, 2.5% of the time the closing price was the same, and 47.5% of the the stock price was lower.  But, that was the daily chart pattern.

What I found when you looked at the weekly chart patterns was different: The chart pattern showed an increase in price from one week to the next 55% of the time.  On a monthly basis, the numbers were 66% of the time, chart patterns closed with a higher close price.

Stock Trading Patterns Are Noisy

What all of these chart patterns told me was that from one day to the next, there is a whole lot of daily noise.  But, from one week to the next, the overall chart patterns tended to be less noisy and that the real, big-picture was starting to emerge.  And, for the monthly chart patterns, the 66% increasing closing price was a real game-changer for me; one that I could beat the market with.  The monthly bigger picture also taught me a valuable lesson about all of the noise in the markets: It was impossible to trade the noise but, if you took a bigger picture, you can beat the market more consistently.

Empowering yourself with this information will prove to be very valuable to your trading.  Let’s examine how to trade chart patterns & probabilities and see if a game-plan can be installed that will beat the market.

How To Trade Chart Patterns & Probabilities

First, it is important to understand probabilities before you set out to beat the market.  Given that, a very quick and dirty breakdown of probabilities is important to understand.

Probabilities & flipping a coin.

Beat the market with coin flip - Chart Patterns, Trading Patterns, & Probabilities

What are the probabilities of a coin toss?  With a fair coin, the probability is 50% heads & 50% tails.  Keep this concept simple and it makes sense.  Given enough data points, if you flip the coin enough times, you will see that 50% of the time heads show up and 50% of the time tails show up.  But, that is the theoretical world, and the theory actually does not hold out in the real world.

First, if you flipped a coin and got either heads or tails, it would be a safe bet that the next flip would be the opposite.  But, you are not betting on the consecutive flip, you are betting on an independent flip.  And, as it turns out, flips can have streaks.  That is important to think about when you go to a casino and question whether the roulette wheel will land on even or odd 50% of the time, or if there will be streaks.  Ask me how I know that streaks happen and sometimes they go 7, 8, 9, or 10 times in a row where they are all on an odd or even number.

Given that, you need to understand one concept that is important: each flip is entirely independent of the previous flip. And, in the real world, outside of the theoretical world, from time to time, streaks happen so much that if you put enough attempts together at flipping a coin the end result is rarely a perfect 50/50.  Streaks happen, whether those streaks are 2-in-a-row, or more, where one side shows up consecutively.

Consecutive versus independent flips

Beat the market Consecutive - Chart Patterns, Trading Patterns, & Probabilities

So, if a coin flip is 50/50, on a fair coin, then the next flip is entirely independent of the first.  But, if you do get a heads, and you think that the next flip is going to be a tails, one thing I discovered and rationalized (And applied this to my FX trading) is that you are not betting that the next flip of the coin is going to be the opposite, but, instead you are betting the opposite of a consecutive flip.

Now, go through the data points for all of the coin tosses and ask the question: How often do consecutive flips occur?  How many times in, say 1,000 flips, do two heads show up in a row or 2 tails?  And, start applying this information to how many times 3 heads/tails in a row show up, and so on.

So, if you have 3 consecutive coin tosses that are all heads/tails, you are looking at a frequency.  How many times does that frequency happen?  Remember, streaks happen.  But, the probability of the fourth flip being a heads/tails is still 50/50.  But, the frequency of that event happening may be entirely low enough to take the opposite side of that bet.

Roulette Probabilities & Frequencies

Beat the market Roulette - Chart Patterns, Trading Patterns, & High Probability trading

Given that, with frequencies, if you went to the roulette wheel and saw a certain frequency appear that is a low probability event, such as 3 red/black or even/odd, show up, the frequency of a fourth event is low.  Just remember, the previous three events are completely independent to the previous events, but streaks happen.

Ask me how I learned that streaks happen on the roulette wheel but, frequencies of high number consecutive results, despite having a frequency of occurring are low-frequent events.  Keep in mind one thing, something that is hella-important: From one spin of the wheel to the next, the events are completely independent of each other.  But, frequencies are low-probability events.  Each spin is independent.  But, streaks are an improbably lower event.  Still, streaks happen.

Beat The Market: Chart Patterns & Probabilities

How to Beat the market - Chart Patterns, Trading Patterns, & High Probability Trading

Keeping an eye towards probabilities that I explained above, we can apply all of this to trading patterns and stocks.  While I have worked in the markets for a number of years (over 30), I have found that you can apply the probabilities mentioned above to trading chart patterns.  But, and here is the real kicker: Streaks happen.  And, they tend to happen a little more frequently with stocks & FX than flipping a coin or the roulette wheel.  Why?  Simple.

Market sometimes move 2 days in a row in the same direction because of momentum.  With stock chart patterns, one day’s move may actually affect the next day’s move because a news release may have pushed the market in one direction or another.  So, the frequency of 2 days moving in the same direction is far greater than coin tosses or roulette.  Momentum.

But, after the momentum dies down, what do you have?  Data points that are usually pretty consistent with each other.  Remember, 50% of the time, the stock market is going to move higher the next day, 2.5% of the time it will remain UNCH, and 47.5% the stock market will close lower the next day.

Stock Chart Patterns, Frequency & Probabilities

Beat the market - Chart Patterns, Trading Patterns, & High Probability Trading

So, if the stock market has a new bit of information that just came up, and the first 3 days of the week the broader market sold off, what is the probability that the stock market will close on, say Thursday?  The first thing I would ask is: where is the broader market this week versus last week, and, is the broader market due for move higher or lower based upon the previous few weeks’ closing price increases/decreases? And, what about the monthly chart?

When you look at probabilities & chart patterns, remember, streaks happen.  With the stock market, chart patterns tend to move higher over time more so on a weekly basis, and definitely on a monthly basis.  So, if you start to look at chart patterns and you incorporate the daily picture, the weekly picture, and definitely the monthly picture, you begin to see that probabilities can work in your favor.

Just keep one thing in mind: Streaks happen.  And, knowing that, you can empower yourself to trade more effectively.

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