Pattern Recognition- Friend or Foe?

One of our greatest strengths in our brains is pattern recognition. We see a face we are familiar with; it brings us joy and we approach for a conversation. We see a tiger and we run. Pattern recognition is deeply seated within our brain and has kept our species alive for tens of thousands of years. You can’t escape your default mode of seeing patterns consistently. It’s part of who we are. 

Your brain seeks patterns to fit the stimulus, a process neuroscientist call Pareidolia. With Visual Pareidolia our brain is constructing what we think we see and remember; it’s also trying to match a pattern to patterns it’s already familiar with. This is where the difficulty resides for traders. 

As you may recall, you cannot absolutely trust anything you think you see or perceive. Perceptions errors and brain recall is plagued by bias, reconstruct errors and more. The phenomenon of perceiving patterns—whether in visual information, other sensory information, or even events or behavior has inherent error. It’s also interesting to note that once you see a pattern in random stimuli, it’s very difficult, or even impossible, to not see it. Once a trader learns technical analysis, everything looks like a potential double top, head and shoulder reversal formation, bullish flag pattern etc. 

You only see what you concentrate on the most. If your last seminar used XYZ technical momentum indicator, that is all you look for in your next trade, passing on some other potential winners. We are always prone to recent memory bias in our current thinking and trading decisions due to our brain anatomy alone.

 One of our greatest weaknesses as traders inherent to our brain is to see a pattern that doesn’t exist. We literally make up and see the pattern where one does not exist. You see a breakout where the market sees resistance. In trading, anything can happen. You may have a great set up pattern for a technical trade and the equity trades in a way entirely unexpected. That’s why you should always be concerned with risk analysis and limiting your downside. That is what helps makes a good trader long term. 

The phenomenon of perceiving patterns—whether in visual information, other sensory information, or even events or behavior comes naturally from our evolutionary past. Humans generally have a great ability to recognize patterns and a tendency to see patterns even when they are illusory. We need to use critical thinking skills housed within our prefrontal cortex to systematically test apparent patterns to truly know if an pattern illusion is real or not. That’s why it's called the executive suite. 
Here are some steps to get you in the right direction with pattern recognition.