Financial Trading Patterns #0
Nov 22, 2011 at 3:47 pm in Orders by
If you’re wondering why I’ve numbered this first-in-a-series article #0 rather #1, it’s because in this article I want to introduce the idea of financial trading patterns, and explain how they will be presented in the subsequent installments. I’d like to number the first of the trading patterns as #1 — which leaves #0 as the number for this introductory installment.
Incidentally, in computing circles a list of ten items is often numbered from #0 to #9 (starting at 0) rather than from #1 to #10, and it is from computing that I draw my inspiration for cataloguing common patterns of trading behaviour.
Computer software designers often refer to a catalogue of software “design patterns” which are pre-built solutions to common computing problems. This is rather like how a book of knitting patterns provides you with generalised recipes for “knitting a scarf” of “knitting a hat” that you can adapt for your own specific requirements (like head size).
The Financial Trading Patterns in my series represent recipes for trading actions that are designed to achieve specific objectives like “buy low, sell high” and “buy high, sell higher”. As such, they are not to be confused with chart patterns such as double-tops and cups-with-handles.
Anatomy of a Financial Trading Pattern
In common with software development design patterns, my trading patterns will be presented in a standardised format comprising:
Name: A concise name that allows me to refer to the trading pattern and to distinguish it from other trading patterns; for example the first pattern is named the “LIMIT BUY” pattern.
Definitions: The underlying stockbroker or spread betting provider trade types or order types that are utilised when enacting the trading pattern; for example a “trailing stop order to sell”.
Parameters: Values that you can adjust in order to optimize the trading pattern without affecting the form of the pattern, rather like adjusting the “knit a hat” pattern for different head sizes. In the trading case this might mean adjusting the trailing stop distance.
Objective: Each trading pattern aims to address a specific trading objective like “buy low” or “sell when the trend ends”.
Motivation: The motivation goes further than the objective in describing why the trading pattern is necessary. What cumulative problem (not addressed by earlier trading patterns) does this one solve?
Success Scenario(s): One or more scenarios that demonstrate how (and when) the trading patterns works correctly.
Failure Scenario(s): One or more scenarios that demonstrate the circumstances in which the trading pattern fails.
Application: Discussion of how the trading pattern might be put into practice using a stockbroker or spread betting provider, along with any real-life limitations that may be imposed.
The Financial Trading Patterns
Now that you know what a Financial Trading Pattern is, and how each one will be described, it is time for us to move on to the first pattern — the LIMIT BUY pattern — in my next article.
Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.