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Patterns To Watch

Technical Analysis vs. Pattern Setups

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Written by Timothy Sykes
Updated 7/21/2022 5 min read

Marathon Digital (NASDAQ: MARA) rose more than 60% since Monday.

Heck, the S&P 500 is up almost 7% in less than a week!

There’s a lot of bullish momentum hitting markets right now.

If I’m so certain, why don’t I trade this idea?

I get this question from folks who join my millionaire challenge, and it’s a good one.

You see, I can read any chart out there using technical analysis.

However, that doesn’t mean I SEE a trade setup.

This distinction is important because confusing the two can get you into bad trades.

Not to worry.

I’m going to break down the key differences between them so the next time you look at a chart, you know whether you’ve got a trade on your hands or not.

Two Sides of the Same Coin

Techincal analysis is the study of charts to predict future price action.

We look at the change in price and volume over time to forecast what might happen next.

For example, let’s look at a daily chart of MARA.

I drew several important price levels based on where I would expect support or resistance.

Technical analysis tells me:

  • The overall trend is down.
  • However, bulls recently regained momentum.
  • Recent price action pushed shares over the first resistance level on heavy volume.
  • Broader markets showed a lot of bullish behavior in the last few weeks.

Taken together, I would expect MARA to push higher over the next few days if not weeks.

So, why wouldn’t I just lay down $10K to buy shares right now?

Let me reframe the question…

If I bought shares right here, where would I set my stop and price target?

I could use the last support level as my stop, but given the huge move the last few days, who’s to say the stock doesn’t swing down there before making its next move higher?

Technical analysis gives me an idea and read on the market. What it doesn’t necessarily tell me is how it will get there.

There are a lot of unknowns with this chart.

The only way to narrow those down is to use a trading pattern.

Why Patterns Work

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Chart patterns are a very specific type of technical analysis.

Not only do they forecast WHAT will happen but HOW it’s likely to happen.

Lytus Technologies Holdings (NASDAQ: LYT) is a great example.

Several of my millionaire students including Tim Lento, Jack Schwartz, Jack Kellogg, and Kyle Williams all banked on a strong short position.

Using the framework I teach in my mentorship program, each of these traders identified LYT as a possible short opportunity.

They all noticed:

  • Heavy promoters at work
  • Recent IPO
  • Huge run in a matter of days

Knowing this, each of them arrived at the same conclusion – shares would likely collapse.

Now, an inexperienced trader might look at the run and try to guess where the stock might top out.

That’s like buying a stock in freefall, it’s a great way to lose your shirt.

Instead, my students use the framework I taught them to enter the trade and manage risk along the way.

They did this using chart pattern setups.

Here’s a hypothetical example using LYT.

Let’s say I see shares start to make a move lower out of the gate.

How do I know that it isn’t just a fakeout?

One clue was the stock went limit down five times in a row.

Through careful study and data collection, I might have discovered that once a stock goes limit down two times in a row after a huge run, it’s likely the start of a collapse.

Using that information, I could enter a short position targeting a move back towards the lows with a stop at the highs.

Some chart patterns are very specific while others, like a bull flag, are a bit more broad.

The broader the pattern, the greater the odds you find a potential setup, but also the lower the odds it works out as intended.

The Bottom Line

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Technical analysis and chart patterns go hand in hand.

Learn to incorporate both to maximize your potential.

—Tim


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”