Trading hidden patterns

|18th May 2023|

Finding hidden trading patternsYou’ve been waiting for a pattern, it’s the first time you’ve ever traded a seasonal pattern, you're about to take a trade but the market goes the other way. Rubbish, and off you go to find another holy grail. Frustrating yes, but what if the pattern was fine, you were simply looking at the wrong one? 

We’ve all heard the saying ‘a little knowledge is dangerous’. Well, in trading that is certainly true and it’s also true in the example I am about to show you. Seasonal patterns get talked about all the time, often by traders that neither trade them nor understand them. The 'Santa rally' is a prime example. Many non-seasonal traders have even heard of this pattern and expect it to happen every year or else all seasonal patterns are useless. The bad news is, the pattern isn’t supposed to happen every year but that doesn’t mean there isn’t a pattern there to trade.

Let me show you an example. GBPUSD has some of the best seasonal patterns of any market, having 5 patterns with a greater than 75% success rate over the last 20 years, pretty decent. One of them is very well known and that is its bullish April pattern. As you can see from the 20-year seasonal chart below, the period from April 11th to May 1st has been successful in 15 of the last 20 years. A fantastic pattern, and one I have traded many times over the years. 
GBPUSD seasonally bullish April chart

Rewind to 2022, however, and GBPUSD had one of its worst ever Aprils, to which I got many emails saying seasonal patterns were pointless. The chart below shows the price movement for 2022 only (you can look at any individual year like this on our new platform), and there is no denying GBP had a terrible April. Now ordinarily I would have said its just one of those things, some patterns don’t follow through as expected, but I now know different. 
GBPUSD hidden seasonal pattern

I have long suspected that there would be patterns within patterns but never had the tools to find them, until now. What I mean by that is, a market may have a very successful pattern but there will be years it doesn’t play out as expected. My belief was that the years that don’t play out as expected are still following a consistent pattern, but a pattern that only occurres in years where the other pattern ‘failed’. And guess what, I was right. 

One of the key features I wanted to have on the new seasonal platform was the ‘What if’ function. I wanted this because I wanted to ask the software, ‘what if April is bearish’. The timing of GBP’s April failure in 2022 couldn’t have been any more perfect because we were deep in the process of developing this feature as it crashed lower through April, May, and June. The downtrend seemed like it would never end. So, it was perfect that I had the software and was able to ask it what happens when the typical bullish GBP April pattern fails, and instead closes negative for the month of April. To my complete amazement, the software found a bearish pattern that has an even higher success rate than the well-known bullish pattern.
 
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In the 48 years we have data for GBPUSD, there have been 14 years prior to 2022 where GBP was negative through April, and during those years, April 11th – May 1st, was a successful bearish pattern a staggering 78% of the time. But that’s not all, if you look at the entire annual pattern below, created with only bearish April years, you can see that GBP moves sideways through January and February, breaks lower in March, before another break lower mid-April. The down trend then continues through the summer, before finally making a low on September 29th and then rallying higher through to year end. Look familiar?
GBPUSD bearish seasonal April chart

Scroll up the page and take a look again at what happened in 2022. Not only was the bearish April pattern successful again, but the entire year also followed the exact pattern for a negative April year. Of course, it wasn’t perfect. I mean, the eventual low occurred on September 26th, not the 29th, but I think we can all agree, this is an amazing finding. 

'GBPUSD is bullish in April' is the little knowledge that is dangerous to traders because it makes them believe it must happen every year. It doesn’t and it won’t. The good news is, however, that I no longer need to leave it at that and go off to find another pattern. I now have tools to find even the hidden patterns, and I know what to expect and how to trade GBP when April is bearish.

There are hundreds of hidden patterns like this in the markets we all trade every day, and the two most advanced features on our new seasonal platform, 'What if' and 'True Path' were designed specifically with the intention of finding these patterns. So you always know what a market is doing and how to trade it. 




Happy trading

Ray Gilmour
Founder & Senior analyst at Markets Made Clear.com