How Many Patterns Do You See Here? A Forex Trading Quiz - Chris Capre

I have been working really hard lately on my upcoming book 'Trading Price Action' which I am seriously looking forward to finish and deliver to the world at large. Currently I am dissecting a chapter on pattern recognition and came across this interesting chart. In trading, we often look for fixed patterns we are trained to see, such as;

Inside Bars
Pinbars
Outside Bars
etc.

Although this has its benefits to spotting key formations in the market which can lead to good price action setups, we can actually get stuck into a routine of just looking for patterns with relatively fixed variables. This can actually hinder our overall pattern recognition skills to spot newer patterns and this is one of the most important skill sets of a trader - pattern recognition.

I have talked about methods to build this pattern recognition ability, such as brain gyms, like Lumosity as a way to build up the neural connections and spot patterns more easily in the market as one method. Another is going back and looking at historical price action, and in I thought this would be a good exercise for you to work on a particular chart I am writing about in my book.

The Exercise

First off, you will need a watch or a something that keeps track of time as you will want to time yourself on this. If your phone has it, set the stopwatch feature whereby you hit go, and it starts counting the time. You will also need either a sheet of paper and pen, or a word document open to type your answers.

What you are going to do is for the next several minutes (as much as you need) look at the chart below and tell me what patterns you see in the market. Not what kind of bars you see, (pinbar, inside bar, etc.) as that does not take too much skill and is something that can be easily learned. Practicing something that is easily learned does not breed new neural connections which is what we want to do here.

What you are looking for is patterns in the price action behavior, what do you notice about the price action, what patterns are you seeing that repeat themselves. There are actual behaviors in this chart you are about to see that repeat themselves. This is what you are looking for - patterns in the behavior. They can be of any kind, but ideally, the ones you find that are most useful for trading.

Remember, if something happens once - its an occurrence. If it happens twice - its a pattern. If it happens three times, its a program derived from minimally one pattern. So what you are looking for is anything that repeats itself 2x or more. Thus, take as much time as you need.

Write down or type all the patterns you can find in this chart. I am going to cover up the name of the pair, and the dates, but I will tell you what the time frame (1hr chart). There is one line on the chart which is a 20ema which can be used if you so wish in your discoveries.

Keep in mind, I have gone back anytime in the last 30yrs to find this chart, so even though the prices may seem like they offer a hint, there are a lot more possibilities of pairs that had these prices so try not to think about the pair. You are just looking for patterns in the price action behavior.

With that being said, get your stopwatch, pen/paper or word document open. As soon as you begin, start your stopwatch and begin to write or type as many patterns as you can see. Once you are done, then mark down the time as you will need this later.

Ready? Begin with the chart below.

Ok, now that you are done, make sure to write down the time and how long it took you to find all the patterns that you did.

The next step is to look at all the patterns and price action behaviors, then come up with a few strategies based on what you noticed. This is because I am going to show you the very next candle in the chart, and if you really did a good job at isolating some key patterns, you probably have at least one strategy for the next candle (regardless of what it is).

Once you see the following chart with the next candle in this series, the go back to your list of strategies, and decide what you think is the most appropriate for the new candle. Make sure you have written all the rules for the strategy, such as your entry, stop and limit. Position sizing is not important - just that you can isolate a pattern, make a trading strategy off this, then apply it on the next candle.

Ok, so you should have all your strategies and rules in place for taking (or not taking) a trade on the next candle, which you will see in the chart below.

So this is the chart one bar later. To make it a little easier for you to make a decision, I have decided to provide the data on the last blue candle with the black dot above it which has the following pieces of data;

Open: .8275
High: .8285
Low: .8260
Close: .8280

One more piece of data, the low on the red candle prior was .8259.

So armed with all that data, along with all the patterns you recognized in the price action, and with the strategies you came up with, take a moment to figure out what is the best strategy to trade this blue candle. You can either decide to;

a) trade this blue candle
or
b) not trade this blue candle

If you decide to do A and trade this blue candle, then what you are going to do is decide what is the best strategy to trade it. This means having all the rules for entry, along with placing your stop and limit. Now here is the kicker;

Whatever strategy you use, has to be out of the position in 3 candles.

Why?

Because these are the last 3 candles for the week, and the market will close for the weekend which is also a holiday weekend and there is a G20 meeting which will have a major impact on the market.

So, that is the challenge. Come up with a strategy that you think is best to trade this pair now that the blue candle is closed. You have to be out of it in three candles so you can be out for the holiday weekend, hopefully in profit with a smile on your face.

With that being said, I am going to post the next three candles tomorrow on the following page around this same time;

http://2ndskiesforex.com/strategies-for-forex-trading/forex-signals/

You will want to look for the post which will be called 'Forex Trade Signals and Setups Feb. 21st'

In this post I will provide the chart with the next three candles, and then you can compare how your strategy did and share with me what your strategy was, rules for entry, stop and limit, and what the final result was.

What I am going to do is share with you my strategy, what patterns I isolated to come up with it, and how it played out. I will give you a few details ahead of time, but want to explain the background to this challenge:

I came to this chart as I was doing some practice through my charting program, which will take any pair, hide the dates, the actual pair, change the numbers on the prices, but will correlate them to the real historical price at that point in time.

Then what it does is challenge you to trade that chart in that point in time bar by bar. If you want to trade at the end of the bar, you do, if not, you don't. It does a very good job at giving you real practice in reading price action because you are trading bars as they come in real time, just like real trading.

Sure, its not real money, but the point is to learn to find patterns in the price action which is a great exercise to do, especially when the market is closed on the weekends.

Now here are some points I'd like to share;

1) When I started looking at this chart, in < 1 min, I was able to isolate 4 key patterns, even though there were many more
2) from these 4 key patterns, in < 1 min, I was able to come up with a trading strategy for the next bar if it had certain characteristics
3) with this new blue bar, I was able to trade it having a R:R ratio of 3:1 based on the strategy I came up with

And I will leave you with that for now. So make sure to come back tomorrow to the link I shared above, to see the next 3 bars, and how your strategy did. Then make sure to leave a comment how your strategy did, what was the entry, stop and limit, or if you didn't trade at all.

Remember, there are no points for cheating, so only honesty here. It really does nothing for your trading process if you are;

a) not honest, and
b) only try to inflate your ego by looking cool on this post

Remember, in a week or two from now, this post will rarely be seen, and nobody will really care how you did so skip the ego part of trying to look cool, and just be honest with what you did and how it played out.

The whole point of this is to be an exercise whereby you;
a) test your pattern recognition skills
b) see how quickly you can come up with the patterns
c) see how quickly you can formulate a strategy (or strategies) based on the patterns you noticed in the price action

This is about as close to what you are doing in real trading - spotting patterns, finding opportunities, and trading the right edge of the charts as they come to you, bar by bar. You have to make decisions based on what you see and what you think will happen.

But in reality, nobody knows what will happen with the next bar - and that is the friction we all love (or dislike) in trading. Its the mystery, of what will come next, of not knowing, but seeing if we can find the answer ahead of time by being a detective and looking at all the available clues. Some of us are closer to Sherlock Holmes, & others are closer to Inspector Clouseau.

Regardless of where you are at, the mind has a neuro-plasticity to it which means you can learn to be an expert in spotting patterns and key price action clues from charts just like these. In an article I will write on this Thursday, I will discuss some key things you can do to improve your learning process, so you can enhance your pattern recognition skills, along with tailoring the educational process to help accelerate your learning curve to trading profitably.

I look forward to your responses tomorrow.

Kind Regards,
Chris Capre
2ndSkiesForex.com
Twitter; 2ndSkiesForex

If you liked this article, make sure to click the 'Like' button below.

And also check out my latest article called Ode to the 4hr Charts whereby I share an entire years trading report of one my students and how they made 110% in year, just from learning two of my strategies.

Comment by Suleman Ghazanfar on February 21, 2012 at 2:11am: Hi Chris, nice article. the pattern that i saw were:

1. every inside bar blue candle is followed by a red candle.

2. 11/18 are red candles

3. the red candle are bigger than the blue candles.

4. 20 ema acting as support, then as resistance.

it took me about 2 min to see all that.

i took a trade:

sell at .8258

stop at 6 pips above inside bar high

target 2:1 ratio.

Comment by 2ndSkiesForex on February 21, 2012 at 9:06am: Not bad Suleman, not bad.

You spotted one of the four patterns i picked up which is your first pattern.

Solid trading strategy overall so well done

While your at it, see if you can find the other three

But some solid pattern recognition

Kind regards,
Chris

Comment by Peter jcp on February 21, 2012 at 5:16pm: Hi Chris - I want to have a go - but later as I hope you get a good cross section of all types of traders commenting on the possible 4 trading strategies you see

You have given main clues - ie 1 hr chart and an ema - although for me I would need to see what time of the 24 hr day it is on the last candle?. Also it gets silly for me then - as was it a Monday / Friday or mid week - and then what date of the month was it etc- and when was the next red announcments comimg out etc etc

Forgetting me and my unusual methods -

Come on all you fx menbers please have a go with your comments - it does not matter if you are wrong - because we are not traders if we cannot get it wrong now and again

Regards

Peter

Comment by 2ndSkiesForex on February 21, 2012 at 5:27pm: Hello Peter,

If you read the article, it says it was a Friday and there are only 3 more candles left before the London close.

But in terms of hour, its in the london session. That is all I can give.

Try not to think about the strategy first, and pattern second. This is about finding patterns first, and strategy second. So see if you can work from that perspective.

Let me know what patterns you recognize.

Kind Regards,
Chris

Comment by Peter jcp on February 21, 2012 at 5:47pm: Will certainly do it Chris - the last 3 candles of the week and the holiday weekend confused me - i suppose I am looking for a trick question thinking is it a Thursday night at 7pm - and it was a bank holiday Friday and the G20 meeting was a Saturday ( not "keeping it simple").:-)

Now you have explained it I will read it again and then answer hopefully after you have at least another 2-3 more entries- as i am keen to see how many get over 3 patterns :-)

Comment by 2ndSkiesForex on February 21, 2012 at 5:49pm: ha, be brave my friend...do not wait for others to post...try it yourself.

remember - pioneers are the only ones who have arrows in their backs

good luck and ill look forward to what you can spot

chris

Comment by Mantas Galvosas on February 21, 2012 at 7:59pm: The very first pattern i saw that after all blue candles we have impulsive red candles. So my first thought after i saw the next bar was how could I sell the pair regarding my strategies. But after few seconds i noticed that the last two candles price action is differnt than all the previous candles:

1.The last red candle is largest and has strong open but it was rejected about 30% of the range;

2.The blue candle is pin bar and it was rejected at the same level like previous candle(only 1 pip different). From the order flow perspective it means that we have very clear and strong bulls at this particular level;

3.And if it would be just a profit taking after breakout of the low, we would see short wicks with closes near the support level (You was mentioned this in your today's webinar).

So after all I decided to go long with entry at 0.8273 level, because:

1. Better risk reward;

2. I think bears still should play the ''blue-red'' pattern and they gonna trigger my entry.

My stop would be just few pips below the low and profit target- the last red candle open.

Another option is to wait for the next candle. The second blue candle would be a great reversal confirmation, because of the broken pattern.

Comment by Peter jcp on February 21, 2012 at 9:03pm: OK Chris - First chart based on a quick 2 minute view of it blown up -

1. Direction down - movement over 150 + pips

2. 17 candles with 6 blue and 12 red

3. Noted top and support zones at round numbers (8400 /8300) and then further supports at 8375 8350 8325 8260

4. Combination of red and blue candles - with red candles being larger and blue candles weak

5. No real pullback or bounce and last red candle the largest.

Conclusion - the trend had been down and with it being an hr chart and over 150 pips then i would be looking at the ATR of pair and wanting to know whether the low at 8259 or 60 area is at major support.

So if i was them moving on to the next chart - i would then be hoping to look at all my other time frames to see if there was a pattern within a pattern and to see whether it had hit major resistance when it fell and whether it was now on major support.

Personally - I would not want to place another trade on the pair - as i hopefully would have already well over achieved my target within the previous periods of the move. As an intraday trader and scalper i would have aimed for a swing trade under 8400 with more additions under 8370 and 8350 - and I would have been scalping mostly at support areas and from the low of the sixth candle and on hourly bottoms of all red candles- with 5 pip stops and targets with RR's of 1.5 and 2's

At the end of all blue candle hrs I would be looking for sells - as the trend was down and i would be always watching to see the lower highs and for lower lows- and seeing where supports were - noted by the the same prices reoccuring in red and blue candles.

I would have hoped on this Friday - that my daily and 4 hr candles had confirmed a bearish view - but would then be relying on other information to see whether the pair was heavily oversold and therefore due a larger retrace up - such as a 38 or 50% and would be looking to see if it tied in with supports shown on way down - ie 8350 - 8325 and 8300 etc.

For me - I would have hoped to have had one swing trade on way down - 4 scalp sells and minimum 3 scalp buys. My best trades would have been the scalp sells based on 5 -10 pip stops and targets of 20-40 - based on 1 hr candle sizes.

My best scalp sell would be on the last red candle - broke through the 8300 area and had momentum still from the down trend. That would be a warning to me to look for a change.

I would therefore have traded the blue candle as a buy - and with your comments being that the blue candle low was above the low of 59 - i would have bought at say 62 with a 5-7 pip stop.

According to your info the high was then 8285 - so I would have made by trade of RR 3 and i would be thinking about a 50% retracement on the previous red candle and would ahve been aimimg for 8295 - and even thinking it might try a touch for the round number of 8300.

After a rise from 60 up to say 8285-8300 - i would expect a pullback lower on next hr candle and a red down to 60 area test.

However the next clue for me - would not be a lower low and instead a chance of another buy in the next hr over 8270 -75

I would also have a pending sell only under 8254 - as with me expecting the low to hold - I would only want more scalp sell under 8254 -- and then would only be looking for another 15-30 pips max.

With only 3 hrs to play with and late in the day - I would not be looking for my normal 3-5 trades - but except i could take two -

ie pending sell under 8255 and buys over 65 with targets of 8285 - 8295 - 8300 and 8310.

It would then be seeing if 8260 was good support - and the trend changes - or whether we made 8310 or even 8325 - and then dropped another 100 pips the next working day.

PS - I would have gladly come out my swing sell at 8260 - as that swing would have been on a maximum of 12 pips stop and therefore would have given me a RR of over 6 -

Comment by 2ndSkiesForex on February 21, 2012 at 9:51pm: @ Mantas - good, you followed the exercise, which was to simply look at the price action, notice any patterns, write down those patterns, and make a strategy / trade based on those patterns.

Nobody was asking for what somebody would have done for the prior candles - no trading career has ever been made on what someone would have done in the past.

But more importantly - that was not part of the exercise. The exercise was to work on pattern recognition of what you saw in the previous price action, the formulate a possible strategy to trade the next candle (either you buy, you sell, or you stand aside).

But overall, some interesting patterns were spotted here so well done so far.

Ironically though, only one of the four I had noticed has been spotted. Interesting so lets see where this goes as I'll be writing my follow up post in about 1.5hrs.

Talk soon - but overall, really good stuff so far so well done to all.

Kind Regards,
Chris

Comment by 2ndSkiesForex on February 22, 2012 at 12:50am: ANSWERS TO YESTERDAYS POST

As promised, I would post the next 3 bars in the chart, along with the 4 patterns I spotted from yesterday's chart. Many of you came up with some nice responses and spotted some really good patterns in the price action so well done to all.

Here is the chart below again to refresh your memory with the last candle shown.

Now that you have seen the chart again above, here are the four patterns I spotted along with the strategy I formed form these patterns.

1) Every time a bull candle forms, the following candle is a bear candle
2) For the last 3 bull candles that formed, none of them took out the prior bear candles high
3) Out of all the 6 bull candles that formed, only once did the following bear candle break the high of the prior bull candle (1 did technically by a half a pip)
4) Using the information above, if I had sold on the open of the first candle after a bull candle, I could have placed a stop 3pips above the high of the prior bull candle, and targeted a 3:1 Reward to Risk Ratio every time which would have played out.

Strategy: Based on the four patterns above, on the close of this bull candle, I will short on open, and since the bull candle has not taken out the prior candles high, I will place my stop 3pips above the bull candles high, with a 3x target.

Here is how it played out in my simulator

This was a trade I took in my trade simulator over the weekend as I was doing practice recognizing price action patterns and behaviors. It is very easy to get caught up in the patterns we already trade and this can lead to us often forgetting to look for new patterns, or spot behaviors that repeat themselves. I had one system setup available, but because I wanted to hunt for other possibilities, I looked for patterns which gave me an opportunity to trade this better than my system had allowed.

By constantly looking for new patterns, we will notice things we never saw before and this can lead to new insights and abilities in reading price action so hopefully this makes sense and you found some benefit in this.

One more small point. Imagine trading a 5min chart or less. Ask yourself honestly, would you have had time to spot this, process all the information and data, and been able to form a strategy around it? One of you came up with a pretty close scenario, but nobody found a tighter stop, nor was even able to isolate the other patterns.

I've been doing this a long time, and am constantly analyzing price action for patterns, not just systems, but behaviors that are happening in the market rea