The more Quantitative formulas and algorithms are used to create triggers for automated orders, the more advantages for the small lot retail trader. Computer generated orders that use quantitative algorithms are prone to frequent patterns that are very easy for the human eye to recognize with one blink, IF the person has been trained to SEE those patterns.
Candlestick Patterns are known to help with reliability of stock pick selection for intraday trading, day trading, swing trading, position trading, and options trading using stock analysis as the selection process for trading an option. These patterns continually evolve and change over time as new and more algorithms are used in the stock market. The use of algorithms in automated orders and the consistent use of specific order types by several of the most influential institutional groups, provide excellent candlestick patterns for retail traders to increase trading profits.
The problem is that most retail traders, regardless of whether they day trade, swing trade, or trade options are often not keeping up with the newer patterns that have emerged in the past few years. Sometimes the most important patterns are simply ignored or missed because the retail trader only sees what they have been taught to look for, and the rest of the chart appears incomprehensible.
The ability to read stock charts rather than just look for a specific candlestick or indicator crossover is called Spatial Pattern Recognition Skills SPRS. Any retail trader can learn these skills, and most can become experts at chart reading in a relatively short period of time.
Here are some tips on how you can develop your Spatial Pattern Recognition Skills so that you are reading stock charts like a book, rather than just looking at what may appear to be gibberish. A stock chart is always exposing more than what may appear at first glance. So take a few moments to really learn this technique.
Stock Charts should be read like a book. If you approach the charts like you read a book, you will be amazed at what you can interpret and understand about the past, current, and future price action.
By using Spatial Pattern Recognition Skills you take your analysis to a level that few traders achieve. Master Traders who use technical analysis, candlestick patterns, and regularly study stock charts have these skills fully developed to the expert level. They can see what is going on in mere seconds even faster than a computer program could, even with the most sophisticated programming humans are capable of writing.
Here are the tips:
1. White backgrounds with black candlesticks provide the easiest and fastest way for the eye to register and recognize patterns. Sure you can stick with the black background thinking it is the “cool” or “hip” way to have your charts displayed, OR you can accept that what you really want is to make higher profits and switch to what your eyes can interpret the fastest and most accurately. Statistically, traders who use white backgrounds with black candlesticks have a 25% higher profitability consistently.
2. Make sure the ratio is the Golden Mean. Many traders make the mistake of not having the proper height to width dimensions so that the candlesticks are properly sized for easy reading. What happens then is that the candlesticks are not dimensionally correct and the trader tends to rely more on line price indicators, which are proven to be lagging in the current automated marketplace.
3. Do not clutter the candlestick price chart with indicators, less is more. Even moving averages are so lagging that their usefulness is questionable. By having a clean uncluttered, properly sized candlestick chart, your pattern recognition will improve more quickly.
4. Maintain the same dimensions and sizing. Many traders are using mobile devices and change the sizing due to variants of the screen size. It is impractical to believe that you can study a stock chart properly and accurately using a Smart Phone screen. You are simply increasing your risk of mistaking a pattern.
5. Know the footprints of each different Market Participant Group. Learning to read a stock chart like a book means that you can immediately recognize the footprint of every one of the 9 market participant groups. Each Group has distinctly different price patterns and creates uniquely different candlestick patterns, because each group uses specific types of orders, algorithms, and formulas for automating their orders. Each group has a different venue, common lot size, time of day they trade, capital base, and reason for buying or selling at that price level.
6. Historical data is just as important as current candlestick patterns. Do not ignore the prior history and story revealed in the candlesticks that formed in the past few months for the stock. This is often ignored or dismissed as not important by intraday, day, swing and options traders. Within the historical candlesticks you can see who was in control of price as well as how price reacts when that market participant group controls price, and this tells you what to anticipate for near term price action for that particular stock.
7. Each stock will have its own distinct candlestick patterns. Just like humans are unique, so too are stock charts. Each stock will have its own repeated patterns due to which of the market participant groups frequently buy that stock. This means that as you develop your Spatial Pattern Recognition Skills, you will discover that certain patterns are easier for you to recognize and work best for your trading style and strategies. This will make it easier to streamline and speed up your stock pick selection, while earning you higher gains on your trades.
8. Use modern chart analysis with the current candlesticks that have become dominant in the past few years, rather than using the outdated and often obsolete patterns of decades ago.