5 Great Ways to Improve your Pattern Recognition Super-Powers!

This article is part of a series on Professional Trader Habits and Beliefs

“In short, no pattern is an isolated entity. Each pattern can exist in the world only to the extent that is supported by other patterns: the larger patterns in which it is embedded, the patterns of the same size that surround it, and the smaller patterns which are embedded in it.”

-Christopher Alexander

Many people are not aware of the sheer potential our unconscious has to observe and deduce what we see. It can be used to our advantage, and actually encouraged and improved.

Often, we confuse ‘instinct’ with our unconscious collection of fight or flight reactions. Our ‘instincts’ as we know them, are a collection of genetically and socially inherited shortcuts that we can access when we are under duress; survival go-to tools. Now, there is a lot of evidence to demonstrate that instincts can be both right and wrong, and the difference between the two comes from experience; the more experienced a person is, the better their instincts are.

In the military, basic training involves breaking down a new soldier, in order to rebuild them, and to rewire their fight or flight responses under artillery fire. If you learn to scuba dive, a lot of effort goes into understanding how our natural instincts attempt to prevent us from drowning, can often result in panic and indeed, drowning. Crowd behaviour, a science on its own, regularly shows that large masses forgo rational thinking and cause much more harm than good.

This is not to say that following your gut is a bad idea, but it can be. The goal of this article is to discuss how we can harness, train, and improve our gut instincts.

From an evolutionary perspective, our unconscious is there to identify and learn universal patterns, from other organisms’ behaviour, to the change of seasons, to economic correlations, and so on. It is a way that nature allows us to learn and get an edge over the general chaos out there. We can determine cause and effect through patterns.

Think of our conscious and unconscious brains as a driver and passenger in a car. The conscious part of our brain is the driver, constantly having to navigate the huge influx of data and information heading its way, and what is worse, is that it has to act and make the right decision ‘all the time’. Because it is responsible for processing and doing everything, the pressure to judge, and act, is tremendous, so things can be missed, stress can cause over-reactions, and mistakes can be made. No wonder we have to sleep every day, it is exhausting.

Now, the unconscious part of our brain is sitting in the passenger seat and it does not have to do anything, except watch. It can even ask questions of the conscious, and get answers. It is even capable of looking around us, to areas and things that our active conscious brain is too busy to focus on. You see, there is no pressure for the unconscious to do anything- it doesn’t have to act (most of the time), or judge everything, or even focus on anything in particular. It just observes.

Now and again, the unconscious passenger spots something, maybe makes a connection, and if it thinks it is important, mentions it to the conscious part of our brain.

Malcolm Gladwell wrote and excellent book called Blink, which covers this concept of shortcut impressions often being the right ones. Using a fire fighter as an example, this gentleman was able to ‘instinctively’ detect a pending collapse inside a burning building. The fireman reached a life-saving conclusion in an instant, but when he tried to break down how his instincts had warned him to stay clear, found it was an assembly of sounds, memories and experiences that drove his unconscious brain to alert him to danger.

Our instincts can alert us to rewarding stuff too! Anything we train it to do. That’s the good news!

When we trade successfully, we have taught ourselves to identify moneymaking opportunities in an environment that produces them in cycles. We learn that certain patterns, such as price action structures, in conjunction with other technical ingredients, such as moving averages, Fibonacci levels; support and resistance levels and momentum indicators are likely to go in a predetermined direction. As we get more and more experienced, our brain is able to identify similar conditions, of either negative or positive outcome patterns with much greater ease. As a beginner trader, we are blind and deaf to what we observe on the market charts, so we require tutelage and checklists and practise. We then learn to read it, with less and less effort over time, until it appears to be completely natural. Humans cannot feel effort or strain on the unconscious, we only physically feel it on our conscious, actively-thinking/doing/acting brain, but that doesn’t mean the passenger is not learning! Ask any Psychologist or 5-year old!

So, in order to develop our unconscious brain’s ability to spot great trading opportunities, we can regularly do the following exercises, which will increase our skills, results and confidence, not to mention bottom line profits!

1. Firstly, and most importantly, be aware that your unconscious brain can learn any patterns you focus on.

Understand that, like the food you eat affects your body, what you think and observe (read/watch) affects your brain. Be acutely aware of what you expose your pattern recognition machine to. Your brain has no idea of what its own limits are, except what you ‘believe’, and if the last 170,000 years of human history is anything to go by, our brains can do anything we set our minds to do.

Remind yourself constantly that your brain is learning to identify high probability AND low probability trade setups.

1. Focus on good patterns first.

As mentioned in the previous point, our brain remembers what we focus on the most. If you want a different outcome, do things differently. Do not focus on low probability patterns the most, because they will be all you see. Teach your brain what high probability setups look like. Learn the strategy inside out, find it in multiple timeframes, across all trading instruments and see for yourself that not all setups are the same; also realise that strong setups do have similarities! Keep records of good setups, the ones you have traded, and the ones you’ve found. Trading is a visual activity so keep visual references.

1. The more detailed the better.

We find that high probability setups have lots of supporting factors. Learn and master as many ingredients of the high probability trade setup patterns as you can find. The best trades have an abundance of these characteristics. You want greater success? You want more reasons to take a trade? Find more reasons!

1. Be selective!

Have some kind of quality threshold. Often boredom, desperation and revenge make us feel entitled to doing something stupid, that we know we don’t have to do and it is self-destructive. I’ll exercise like mad, eat well, and then binge on doughnuts like I deserve it (well, I used to). We can’t do that as traders. Why? Because success comes from consistency, and consistency is not just knowing when to take a trade and when not to, but actually sticking to that, until it becomes muscle-memory. Remind yourself to trade setups that look like the best patterns you’ve ever seen, and have the patience to pass on the not-so-great ones.

1. Be confident.

In case nobody told you, a positive mindset is one of the key attributes of a successful trader. Negative mindsets cause us to change tactics too often, and panic, and result in inconsistency, which is the opposite of what we want.

Remind yourself to put your effort into the qualification of your trade setup (pattern) and the execution and management of the trade, and not the outcome or money involved.

Confidence is a learned skill. It is a conscious choice to think one way, over another, and ‘not look down’.

We have all heard the optimist versus pessimist argument of the water and the glass, but statistically, optimists win. After researching in detail in the 1980’s, Michael Scheier and Charles Carver stated:

"We know why optimists do better than pessimists, Optimists are not simply being Pollyannas; they're problem solvers who try to improve the situation."

Have the confidence to stick to your high probability pattern setups, and the results will come.

Follow the link below to register for our next live webinar:

How to Trade Forex with Precision runs on

• Tuesday 15th September 2015 @ 8pm Auckland, 6pm Sydney, 9am London and 4am New York

Regards,

Adam Harris

The TWP Team