Beating the Market With Imperfect Trades

It happens to even the most experienced traders�

You identify a picture-perfect chart pattern setting up. Support and resistance are flawless. The trend lines are clear. Multiple time frames have aligned properly. Every single one of your favorite confirmation tools — from volume to momentum — points to a breakout.

So you dive in. You buy a position and wait for the gains to materialize. Initially, the market tells you your trade is a winner. The breakout looks legitimate, and all is well with the world — until the very next day.

That�s when your trade begins to go south. The stock gaps down below its breakout zone the next morning. Swing traders begin to bail out, pushing the stock down even lower. Finally, you�re stopped out of your �perfect trade.� You don�t suffer a major loss (you followed your risk management procedures to the letter and sold at your predetermined stop loss). But you can�t shake the feeling that something went very wrong�

It can be emotionally challenging to overcome a poor trade on what looked to be a perfect setup. But sometimes, the market �rejects� seemingly ideal setups like the one I described above. The reasons can be limitless. A tough or choppy losing streak in the broad market might kill investor confidence. Or a looming macroeconomic event could put significant market moves on hold until a resolution is clearer. Or it could be as simple as just too many eyes on a single trade.

If you experience a few frustrating failed breakouts in a row from seemingly flawless patterns, you should consider looking at uglier charts.

I know this might seem counterintuitive. As a trader, I�m always drawn to beautiful setups. But sometimes, your best trades will be those breakouts that wouldn�t get reprinted in a technical analysis handbook.

Now, don�t get me wrong�

Identifying and exploiting conventional chart patterns will always be an important aspect of trading. The reason is simply because traditional patterns like head and shoulders, triangles and pennants have helped traders spot quality risk/reward trades more often than not.

But sometimes, the market forces us to think outside the box.

Let�s say you�re not happy with how some of you traditional patterns are working out. Instead of walking away from the market entirely, try a different approach. Forget patterns and concentrate on support and resistance. Look for stocks that have crystal-clear breakout zones — yet lack any specific pattern.

Here�s an example:

The name of this stock isn�t important. What I want you to notice is the resistance level at $32 that has held firm since the big gap lower. The pattern here is secondary. Is it a rounding bottom? Or is this a more complex inverse head and shoulders evolving here? It doesn�t really matter. Resistance looks valid. If the stock were to break above $32, you could see a substantial move into the gap.
Let�s try another:

Here�s a smaller inverse head and shoulders that failed when the broad market took a dive. But even after the gap lower and a pretty substantial pullback, this stock snapped right back like a magnet toward resistance at $8.40.

Despite the broken pattern, a confirmed breakout at $8.40 could still be valid for this stock�

If you�re going to use chart patterns as your primary breakout-spotting tool, you�ll have to treat this like an art. Don�t be afraid to think differently about the potential trades the market is throwing your way on any given week. Because if you sit on your hands just waiting for that perfect chart to come along and sweep you off your desk chair, you�ll end up doing more searching than trading.