Why Pattern Trading Fails Most Traders — Transcript

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1. 0:00Let me show you something that has
2. 0:02probably happened to you before. Right
3. 0:04here we have a very clear resistance
4. 0:06level. Price pushes into it once, comes
5. 0:08back to retest it. This is what traders
6. 0:11would call a double top. Now, when a
7. 0:14trader, especially maybe a breakout
8. 0:16trader, might see this type of setup,
9. 0:18the explanation is pretty simple. The
10. 0:20idea would be that if price comes up and
11. 0:22breaks this level, the market should
12. 0:24move higher, and it should probably take
13. 0:27out at least this high. I mean, that's
14. 0:29what breakout traders are probably
15. 0:30thinking. So, they're sitting here
16. 0:32waiting exactly for that to happen. Now,
17. 0:34as price moves up,
18. 0:37we get the break. We start breaking past
19. 0:39the level.
20. 0:42Now, at this point, breakout traders may
21. 0:44be entering into this trade to have a
22. 0:46continuation for us to push higher, to
23. 0:48at least take these highs and maybe
24. 0:50continue momentum further up. The
25. 0:52pattern looks clean, the breakout looks
26. 0:55legitimate, we're picking up some speed,
27. 0:56it looks like, but instead of
28. 0:58continuation,
29. 1:01the breakout fails.
30. 1:03We never take the highs, we never
31. 1:04continue higher, and price essentially
32. 1:06immediately reverses. And suddenly, all
33. 1:09of those traders who try to enter in on
34. 1:11the breakout right here are trapped. So,
35. 1:13I guess the question would be, if the
36. 1:15pattern was correct, and if the breakout
37. 1:18was real, why did it fail?
38. 1:21Because patterns don't move markets,
39. 1:23participation does. And this is the
40. 1:26mistake that a lot of traders make when
41. 1:27they're learning how to trade. They
42. 1:29treat patterns like they cause price to
43. 1:31move, but patterns are just shapes, and
44. 1:33they're just descriptions of what price
45. 1:35already did. They don't tell you who's
46. 1:37actually participating in the market.
47. 1:39And to understand that, we need to talk
48. 1:41about how markets actually function. So,
49. 1:44before we go any further, we need to
50. 1:46understand something that's fundamental.
51. 1:49The market isn't just a chart, it's not
52. 1:51just candlesticks on a canvas, it is an
53. 1:53auction. And if you don't understand how
54. 1:55auctions work, it's very easy to
55. 1:57misinterpret what you're seeing on the
56. 1:59chart. So, a lot of traders approach
57. 2:01trading with the idea of basically
58. 2:03pattern preference trading, or trading
59. 2:05patterns that they see, whether that
60. 2:06might be double tops, head and
61. 2:08shoulders, trend lines, whatever it
62. 2:10might be. Now, most traders think that
63. 2:13patterns move markets. They don't,
64. 2:16participation moves markets. And so,
65. 2:18almost every trader they start the same
66. 2:20way, right? Breakout, support flips,
67. 2:22head and shoulders, trend lines, and you
68. 2:24start applying them. You learn these
69. 2:26patterns and you try to apply them in
70. 2:28your trading, and the logic feels solid,
71. 2:30and the chart seems to confirm it when
72. 2:32you go back and you back test it, maybe,
73. 2:34and you find a setup that might check
74. 2:36every single box, and you take the trade
75. 2:38and it still fails. So, you find another
76. 2:40one, same result. The pattern looked
77. 2:42right, the entry looked clean, but the
78. 2:43trade didn't actually work. So, this
79. 2:46isn't necessarily like a discipline
80. 2:49problem or a timing issue. This is a
81. 2:51structural problem with how the trade
82. 2:53was actually built. The setup is based
83. 2:55on a shape on a screen, not on what was
84. 2:57actually happening inside the market at
85. 2:59that moment. And that gap between what
86. 3:02the chart shows you and what is actually
87. 3:03driving prices is where most trading
88. 3:05accounts quietly bleed out. And so, the
89. 3:07question worth sitting with is simple.
90. 3:10If the pattern was correct, and we trade
91. 3:12patterns, why did the trade fail? The
92. 3:14answer changes how you think about every
93. 3:16chart you look at from this point
94. 3:17forward. So, the idea is this, right?
95. 3:22Pattern trading feels like it should
96. 3:23work. It makes sense, it's intuitive.
97. 3:26That's exactly why it's so hard to see
98. 3:28the flaw. Now, the standard path in
99. 3:30trading, and what most videos online are
100. 3:32going to show you or try and tell you,
101. 3:35is that people are looking for pattern
102. 3:37recognition, head and shoulders,
103. 3:39breakouts, things like that, fair value
104. 3:41gaps, trend lines, all of those. Now,
105. 3:43these are tools that every new trader
106. 3:45actually learns first. It's like the
107. 3:47first videos that you'll find if you go
108. 3:49on YouTube and you start looking up
109. 3:50trading. And the logic behind them makes
110. 3:53sense, it feels airtight, because when
111. 3:55the pattern appears, then the idea or
112. 3:57the assumption is that price should
113. 3:58follow. It makes sense, and that's what
114. 4:01makes it so convincing. Now, this
115. 4:03creates something called pattern
116. 4:05preference trading. The trader is going
117. 4:07to trust the pattern, and they're going
118. 4:09to assume that the market is going to
119. 4:10respect it. But the market has no
120. 4:13awareness of this pattern. The pattern
121. 4:14is a description of what already
122. 4:16happened on the chart. It's not a
123. 4:18mechanism that actually is going to
124. 4:19cause price to move. The gap between how
125. 4:22logical it feels and how the market
126. 4:24actually works is where most losses
127. 4:27might come from. So, if the pattern
128. 4:29appears, price should move. Well, that's
129. 4:31the assumption that most retail traders
130. 4:33take, and it causes losses, and it's
131. 4:37wrong at a structural level. It's not
132. 4:39about patterns. A lot of traders will
133. 4:42follow this exact belief model. A
134. 4:45pattern appears on the chart, they
135. 4:47assume that it means the pattern is
136. 4:48going to predict the direction, and that
137. 4:50price should follow that. But we're
138. 4:53missing actual market participation, and
139. 4:56that's the missing element. It's the
140. 4:58only element that actually determines
141. 5:00price direction, cuz without it, the
142. 5:02pattern is just going to be a shape on a
143. 5:04screen. Now, we have to think about this
144. 5:07in terms of cause and effect. The
145. 5:09problem isn't that patterns exist.
146. 5:13They exist, the problem is that traders
147. 5:15believe patterns cause price movement. A
148. 5:18breakout pattern does not cause price to
149. 5:20move, buying causes the breakout. This
150. 5:23reversal is not a subtle distinction, it
151. 5:25changes how you read every chart, every
152. 5:27setup, and every failure, and the
153. 5:29mistake is con- fusing description with
154. 5:31causation. So, when traders interpret
155. 5:33patterns as a signal of what the
156. 5:34market's going to do, they're going to
157. 5:36treat it as an effect as if it were a
158. 5:38cause. The chart tells you what
159. 5:40happened, but it has no predictive power
160. 5:42on its own, though.
161. 5:44Now, look at two examples here, okay?
162. 5:46Now, look at how the same price movement
163. 5:48is explained under each of these models.
164. 5:49We have what most traders believe. A
165. 5:52breakout pattern appears, pattern causes
166. 5:54buying, and price rises. Now, what's
167. 5:57actually happening is aggressive buyers
168. 5:59are lifting offers, available liquidity
169. 6:01is being consumed, and price rises. The
170. 6:04pattern appears after the buying, not
171. 6:06before it. And trading the pattern as
172. 6:08the signal is meaning that you're
173. 6:10reacting to an effect and calling it a
174. 6:12cause. So, what actually moves the
175. 6:14markets then? Because if patterns don't
176. 6:15move price, then what does? Well,
177. 6:17markets are moving when participants are
178. 6:19transacting aggressively. That's it.
179. 6:21It's not when a pattern is going to
180. 6:23complete, it's not when a level is being
181. 6:25touched. Price changes direction when
182. 6:27one side of the market, either buyers or
183. 6:29sellers, is willing to cross the spread
184. 6:32and take the liquidity with enough
185. 6:33urgency to overwhelm the other side, and
186. 6:36understanding that single idea is the
187. 6:38foundation for everything that follows.
188. 6:41The market is not a chart, necessarily,
189. 6:44it is an auction. And once you start
190. 6:46reading it that way, the entire picture
191. 6:49is going to change. So, the idea of
192. 6:51markets being an auction, it is a
193. 6:53continuous two-sided auction between
194. 6:55buyers and sellers. So, every tick is a
195. 6:57negotiation on price. Buyers and sellers
196. 7:00compete to transact, and price moves in
197. 7:02the direction of whoever is willing to
198. 7:03be more aggressive. There are two
199. 7:05distinct types of participants in this
200. 7:08process. So, if we look at the diagram
201. 7:10below that shows these two roles, we're
202. 7:13going to understand the difference
203. 7:14between them, and understanding it is
204. 7:16essential. So, the first type of
205. 7:18participant is going to be an initiative
206. 7:20trader. This is someone who moves price.
207. 7:23They need to transact, meaning that
208. 7:26they're going to lift offers to buy, and
209. 7:28they're going to hit bids to sell, and
210. 7:31they're willing to accept worse prices
211. 7:33to get filled, and their urgency is the
212. 7:35market moving. Now, the other type of
213. 7:38trader that we have are responsive
214. 7:40traders. These are the types of traders
215. 7:42that are providing liquidity at price
216. 7:43extremes. So, they're selling into
217. 7:45buying, they're buying into selling, and
218. 7:47they're fading price when it's moved too
219. 7:49far. Their presence stops or reverses
220. 7:52moves, and price movement is determined
221. 7:54entirely by which side overwhelms the
222. 7:57other, and no pattern is going to decide
223. 8:00this, only actual orders in the market
224. 8:03decide this. So, initiative buyers are
225. 8:06the people creating the move. Responsive
226. 8:08sellers are the people absorbing it, and
227. 8:10every trade you take, you need to know
228. 8:12which side you're lined with, and
229. 8:14whether that side is winning. And the
230. 8:16way that we think about this, or we
231. 8:18should be thinking about this, is effort
232. 8:20versus result. Aggression alone doesn't
233. 8:23necessarily move markets, unabsorbed
234. 8:26aggression does. And this is the moment
235. 8:28where
236. 8:29most traders misread the market. You
237. 8:31might see heavy volume and assume the
238. 8:33move is real, but the heavy buying does
239. 8:35not guarantee that price is going to go
240. 8:37up. What matters is whether buying is
241. 8:39being absorbed by something on the other
242. 8:40side. Now, the two scenarios that I'm
243. 8:43about to show below are going to look
244. 8:46identical on a standard chart, and only
245. 8:48the relationship between the effort and
246. 8:50the result reveals what's actually
247. 8:52happening. In scenario A, where we have
248. 8:54buyers in control, okay? We have heavy
249. 8:57buying pressure that enters. The offers
250. 8:59are being lifted consistently, and price
251. 9:01is advancing with each trade, so that
252. 9:04effort or that aggression is being
253. 9:06rewarded with price movement. In
254. 9:08scenario B, there is an absorption
255. 9:10warning. We have heavy buying pressure
256. 9:12that enters the market, we have large
257. 9:14volume prints, and price is barely
258. 9:16moving. It's stalling, or it's getting
259. 9:19ready to rotate, potentially. Now, that
260. 9:21means that something on the other side
261. 9:24is absorbing, and a reversal could be
262. 9:26likely. Now, it's not guaranteed,
263. 9:29because just because absorption is
264. 9:31happening doesn't necessarily mean that
265. 9:33a reversal is going to follow, but it is
266. 9:36something that we need to think about.
267. 9:37Now, when heavy buying fails to move
268. 9:40price, it's informative, and we need to
269. 9:42take note of it, because something large
270. 9:44is on the other side of every single one
271. 9:46of those trades. The buyers are pressing
272. 9:48in, and they're getting trapped. They're
273. 9:49running their head essentially into a
274. 9:51wall. Now, this is exactly the
275. 9:54difference between reading effort and
276. 9:56reading result. On a normal candlestick
277. 9:59chart, both scenarios can produce an
278. 10:02identical looking candle and only order
279. 10:05flow tools are going to reveal which one
280. 10:07actually happened. Now, where does order
281. 10:09flow actually fit into this?
282. 10:11Candlesticks, they're going to show us
283. 10:13what happened, but order flow is going
284. 10:14to show how it happened and who is
285. 10:16actually behind it. And candlestick
286. 10:18charts, they show the outcomes of the
287. 10:20trades, but they hide the process that
288. 10:22created it and that process is
289. 10:24incredibly important because you can see
290. 10:26a green candle, but was that buying
291. 10:28actually aggressive? Was it distributed?
292. 10:30Did it move price cleanly? Did it stall?
293. 10:33And order flow tools are going to open
294. 10:35that up so that we can see what's going
295. 10:37on. And we notice how much information
296. 10:40is absent from a standard chart compared
297. 10:42to what order flow reveals at that same
298. 10:44price level. So, if we were to take an
299. 10:46example where we compare normal
300. 10:48candlestick chart to a footprint or
301. 10:50order flow chart,
302. 10:52on a normal candlestick chart, we all
303. 10:53know what they look like. They have open
304. 10:55high low close. It's the result of the
305. 10:57period. There's no
306. 10:59participation data. There's no
307. 11:01absorption signals. It's just showing
308. 11:03the scoreboard essentially between
309. 11:05buyers and sellers. On a footprint
310. 11:08candle or an order flow chart, we see
311. 11:11the bid and ask volume at every price
312. 11:13level. There's tick by tick transaction
313. 11:15data and there's delta, which is
314. 11:17aggressive buyer versus seller volume,
315. 11:20stacked imbalances, absorption clusters,
316. 11:22and we see the game that's actually
317. 11:23being played. The core question is is
318. 11:27aggression being rewarded with price
319. 11:29movement? If yes, follow it. If no, the
320. 11:32opposing side is absorbing it and that
321. 11:34falls back to that thing that we said
322. 11:36earlier about effort versus result. And
323. 11:39location matters, okay? Because
324. 11:41patterns and and levels, they're not
325. 11:43useless. They just don't do what you
326. 11:46think they do.
327. 11:47Location is incredibly important when it
328. 11:49comes to trading because it's going to
329. 11:51tell you where something might happen.
330. 11:52So, order flow essentially is telling us
331. 11:56if it's actually happening. You need
332. 11:58both. I don't just like only use order
333. 12:00flow. I don't really believe that either
334. 12:03alone is sufficient, but we use location
335. 12:05context as tools. So, you can still use
336. 12:07things like support and resistance or
337. 12:09VWAP or higher time frame levels or any
338. 12:12of these other things that you may use
339. 12:13to build context around a trade. And the
340. 12:15sequence below is going to show how
341. 12:17location and confirmation work together
342. 12:19to produce a valid trade context. The
343. 12:22first step in this, when we're
344. 12:23approaching the markets, is we need to
345. 12:26identify location. Now, this can be
346. 12:29whatever you want to use for location.
347. 12:31Prior highs,
348. 12:32prior lows, resistance zones, supply
349. 12:34demand areas, whatever, okay? The next
350. 12:37thing that we do is once price actually
351. 12:39enters into that location, we start
352. 12:41observing order flow. Are buyers lifting
353. 12:44into that level? Is absorption forming?
354. 12:46What's happening? And then, once the
355. 12:48participation is actually confirmed and
356. 12:51that initiative activity is showing up
357. 12:53and aggression is being rewarded, then
358. 12:55we have valid trade context because now
359. 12:57we have location plus confirmed
360. 12:59participation. That's going to equal or
361. 13:01give us a reason to actually engage with
362. 13:03the market. And location without
363. 13:06participation is not a trade. The level
364. 13:10exists. We're watching it, but if no one
365. 13:12shows up to act on it, then there's
366. 13:14nothing to trade against. Now,
367. 13:15understanding this should change the way
368. 13:18that you might see the market because
369. 13:20when the mental model is right, you stop
370. 13:22asking broken questions. The questions a
371. 13:25trader asks reveals the model they're
372. 13:27running. A pattern based thinking
373. 13:29generates questions that can't be
374. 13:31answered by like observing the market.
375. 13:34But auction based thinking generates
376. 13:36questions that are directly observable
377. 13:38in real time. If we were to look at this
378. 13:40below,
379. 13:41what are some pattern based questions?
380. 13:43Well, those are things like is this
381. 13:45pattern bullish? Should this breakout
382. 13:47hold? Why did my setup fail? Which
383. 13:49pattern is most reliable? Is this
384. 13:51support strong enough? Now, if we think
385. 13:53about this in the terms of auction based
386. 13:55questions, we're thinking about it more
387. 13:57so in the sense of who is being
388. 13:59aggressive right now? Is that aggression
389. 14:01moving price? Is the effort giving the
390. 14:03result that we are looking for
391. 14:05essentially? And is liquidity absorbing
392. 14:07that pressure? Is initiative or
393. 14:09responsive activity winning in this
394. 14:11scenario? And these are not necessarily
395. 14:14philosophical questions. They are
396. 14:17observable in real time with the right
397. 14:19tools. And so, that is what makes this
398. 14:21framework operational rather than
399. 14:23theoretical. The market didn't fill your
400. 14:25pattern. Your pattern didn't describe
401. 14:28the market. And so, if we come to the
402. 14:30realization that patterns are not the
403. 14:32answer, then what should the process
404. 14:34actually look like? If we look at this
405. 14:36side by side comparison of a retail
406. 14:38model and an auction based approach,
407. 14:41it's the same chart, but it's an
408. 14:42entirely different process. Now, a
409. 14:45retail model, we might be sitting here
410. 14:47looking at the charts and we're waiting
411. 14:48for a pattern. We see the pattern. We
412. 14:50enter the trade. On an auction based
413. 14:51approach, we're reading market context,
414. 14:54we're identifying location first and
415. 14:56once price reaches that location, we're
416. 14:58observing the participation. And then
417. 15:00we're only going to execute if all
418. 15:03layers align. So, what are we doing?
419. 15:04We're identifying market context, right?
420. 15:07What kind of auction is happening? Are
421. 15:08we in a range? Is price in balance? Is
422. 15:11it directional? Is it imbalance or
423. 15:13balance? We're identifying important
424. 15:15locations, key levels, value areas,
425. 15:18previous highs or lows, premium or
426. 15:20discount, or whatever else you define as
427. 15:23an important location. Once we're
428. 15:25observing that participation, we're
429. 15:27looking for confirmation. Who is
430. 15:28aggressive at this level? Is that
431. 15:30aggression actually moving price? And is
432. 15:32absorption forming or not? And once we
433. 15:35identify all three prior layers, we can
434. 15:38execute based on confirmed activity.
435. 15:41Now, context alone is not enough and
436. 15:43location alone is not enough. We do need
437. 15:46confirmation. So, the retail model or
438. 15:48pattern preference trading basically
439. 15:51skips the first three steps like
440. 15:53entirely and that's not a minor
441. 15:55inefficiency. It means entering trades
442. 15:57without understanding what kind of
443. 15:59auction is actually occurring or without
444. 16:01knowing where resolution is likely and
445. 16:04without any confirmation that
446. 16:06participation's actually present. So,
447. 16:09the edge in this framework isn't a
448. 16:10pattern. It's the sequence. And the
449. 16:12biggest change isn't just like opening
450. 16:14up an order flow chart or using the
451. 16:16right tools. It's just the perspective
452. 16:18of it. Everything above comes down to
453. 16:20one transition in thinking. You stop
454. 16:23looking at charts as collections of
455. 16:24patterns and trying to pattern
456. 16:26preference trade and you start reading
457. 16:28them as records of auction activity. And
458. 16:31patterns become descriptions, but
459. 16:33participation is what's going to be the
460. 16:35actual signal. The question changes from
461. 16:37what does this shape predict to who is
462. 16:40transacting here and are they winning?
463. 16:42And that shift is the shift that we need
464. 16:44to have. Patterns to auctions. And once
465. 16:47it happens, the way you read every chart
466. 16:49or every level and every trade changes
467. 16:53permanently. So, the summary of this and
468. 16:56what this means for how you trade is
469. 16:58essentially this. Patterns describe
470. 17:00structure, not cause, and they appear
471. 17:03after the participation, not before it.
472. 17:06They are effects, not signals.
473. 17:09Markets are continuous two-sided
474. 17:11auctions. They move based on which side,
475. 17:14initiative or responsive, is more
476. 17:16aggressive. And aggression must be
477. 17:19unabsorbed essentially to move price.
478. 17:21And we have to think effort versus
479. 17:23result. Is the move being rewarded? Is
480. 17:26that effort being rewarded with price
481. 17:28movement? If not, somebody is absorbing
482. 17:31it. And order flow or order flow charts
483. 17:34are going to reveal the process, not
484. 17:36just the result. Who is aggressive?
485. 17:38Where is liquidity sitting and whether
486. 17:40that aggression is actually working? And
487. 17:42the layer of the framework goes context,
488. 17:44location, participation, and then trade.
489. 17:47Every layer of that framework must
490. 17:49confirm before you engage. And that is
491. 17:52the sequence of the edge. And if you
492. 17:54want to understand markets at a deeper
493. 17:56level, you have to stop thinking about
494. 17:59charts as patterns. You need to start
495. 18:01thinking about them as auctions. So, the
496. 18:04next time that you see something like
497. 18:06this, don't just ask whether this
498. 18:08pattern is clean or not. This double top
499. 18:10is clean or not. We need to ask a
500. 18:12different question. Who is actually
501. 18:14participating in the market right now?
502. 18:16Because markets don't move because a
503. 18:17pattern appeared on a chart. They move
504. 18:20when traders are willing to transact at
505. 18:22worse prices. And when that
506. 18:23participation isn't there, even the
507. 18:26cleanest setup in the world can fail.
508. 18:29So, what you're really trying to learn
509. 18:30as a trader is not necessarily patterns,
510. 18:32but it's the auction and how it actually
511. 18:34moves. Is price being accepted above
512. 18:37these highs? Are we going to continue
513. 18:38higher? Or is the move essentially
514. 18:41getting absorbed? And that difference
515. 18:43separates guessing between actually
516. 18:45reading the market. And if you want to
517. 18:47go deeper into this idea, I actually put
518. 18:49together a couple resources that break
519. 18:51this down in a much more structured way.
520. 18:54And one of them explains the idea of how
521. 18:56markets function as auctions. And the
522. 18:59other one walks through the framework
523. 19:01that I personally use when I analyze
524. 19:03participation using order flow. And
525. 19:06they're completely free. You can
526. 19:08download them. I'm going to include them
527. 19:09in the description below so you can read
528. 19:11them. But we're going to we're going to
529. 19:13end it with this, okay? The market is
530. 19:15not random, but it also isn't patterns.
531. 19:18It's participation. So, I will catch you
532. 19:20guys in the next video. Peace.