Proving what you see in short-term patterns
By Joe Ross

The key to successfully finding potential short-term patterns is based on what you see.  There are two things I look for:

1. I look at current market action each day. I do not look at what happened years ago.  I have to trade today’s markets, not those of the past.  Times and conditions change, and I cannot trade history. I look at the most recent market action for possible trading opportunities that might come up the next day. For example, a number of the methods I trade give me setups for the following day’s trading.

2. I’m not trying to look at every possible pattern that might help me to see the most recent market action. Instead, I look for prominent defining characteristics. For example, does this market display a lot of gaps, and if so, what happens when they occur? Or does this market make a lot of inside bars, and what happens when they occur?

If you’ve read some of my books, you know that one of the things I look for is if this market has made a higher high or lower low in the last three days. What I’m looking for is consistency. When I find it, I’m ready to do some testing. Just because the pattern seems to have been working in the past few days or weeks doesn’t mean it will continue to work in the future, or that it worked for the past year. For instance, it seemed that we could trade the E-Mini S&P as follows:

The main idea of the trading was to trade the breakout of the 60-minute bar of 11:00AM – 12:00PM CST, entering the trades after the traders come back from the lunch break.

It appeared that in the last few weeks the breakout would work. Therefore we did some programming and testing. Unfortunately, even with optimizing, we could not make it come out profitably.

Here is what the profit picture looked like.

Definitely not something I’m willing to trade.

You don’t want to rely on just a single pattern. Diversification is a major element in the long-term success of trading the E-mini S&P with short-term patterns. If you trade 24 patterns that have done well, and 1/3rd of them end up not doing well in the future, you still have 2/3rds that hopefully continue to do well. Having a number of setups and methods allows you to become the manager of your chosen methods.  When you trade what you see, you are looking for which methods are giving a signal today. Then, as you are able, you enter those markets in which you have a setup.  Some methods will produce an entry every day, other methods only a few times a month. In all, you will have mostly wins and winning methods by trading from what you see.