Some interesting comments.
Of the traders that I know - they all rely on 'pattern recognition' to some extent but it is more related to behaviour than to a series of bars creating a pattern.
Trader 1 - Trades
40 or so stocks and has been doing so for more than a decade. He'll run 1 to 3 positions at any one time. He has developed a good 'feel' for when a stock is bottoming out/topping. Obviously some of this is to do with seeing a move slow down (which can be done with candles) and some is to do with how far each instrument typically sells off/rallies before reversing
. This does mean a stock can sell off hard in the morning until the Trader figures it's done and he'll get in just based on that experience with very little confirmation off the chart.
Trader 2 - Trades any earnings/news stock he believes will put in a sustained move. He has also been doing this for more than a decade. He has a good idea which news will create moves by now and he also has an idea of the type of pattern he'd like to see. Again, the hard sell off and reversal is a play but he also plays continuation moves. For this trader, all trades are confirmed with L2/Time & Sales on entry. In a sense - it's a scalpers
entry at a point in time where a long term move might develop. As silly as it sounds, on some setups his stop will be 1 cent.
Trader 3 - Trades futures. Mostly this guy trades reversals. He'll trade index futures, grains,oil as well as the Eurex - DAX, Bund futures. He looks for moves of yesterdays price levels and todays price levels. He'll trade measured moves, channels and pullbacks but is mostly interested in large intra-day reversals. All entries are confirmed by DOM
/Time & Sales. I have watched this trader at work many times and his ability to pinpoint reversals is uncanny. Again, he's been at this for more than a decade and knows the instruments he trades intimately.
These 3 are retail traders. The next is a pro.
Trader 4 - Actually this is 4 people, not on. This team is headed by a guy who came through the institutions and who made his personal fortune trading. The money they trade belongs to a hedge fund. Apparently there's some deal where small teams like this can get money from funds to trade as long as they are bringing in the returns. The team work outside of market hours
to identify opportunities and they also work intra-day to identify them too. The guy trading does not use charts but does use L2 at times. The rest of the team use charts as they don't have the head for numbers the trader has. They can have 30 positions on at a time which is necessary as the amount of money they are using is in excess of US $20M. Again, one of the moves they love is a sell off which finds buyers.
Meeting these people was an eye opener to me. I keep in touch with them all. Traders 1, 2 and 3 have all given me some insight into their methods but trader 3 is the one that took me under his wings.
Some of the things I find of interest:
- None of them are afraid of trading a reversal in the right circumstances. The right circumstances might be that LVS generally sells off 50c before making a move up (just an example). So - despite what we hear about reversals being for amateurs, it seems there are people that have cracked this nut.
- None of them use any indicators or candlestick patterns. In fact, the analysis employed seems to be more about how particular instruments or particular events play out.
- There is no particular personality type. One of the above is most certainly NOT a zen-like trading master in control of his emotions. In fact, he flips out when he misses a trade and gets pissed off about it. Another gets pissed when he leaves money on the table. Still - both of these have personally made millions from trading.
This is what leads me to the conclusion it is skill and experience that counts.
The type of analysis I was doing before I started to meet real traders was the typical TA/Indicator stuff. I took a leap of faith with it but looking back there is no reason I should have done that, I had zero evidence that anyone was making money that way - other than books and the internet. When I met real traders, they didn't use these methods BUT they did use common methods that AREN'T in the trading books.