I am a right brained, left handed person who likes life more laissez faire than orderly. And if there was one thing I learned after spending 20-years on a trading floor it was EQ (emotional quotient) was better than IQ (intelligence quotient). In other words getting along with other people was more important than getting better grades than other people. But, that was then and this is now.

Pattern Quotient

When it comes to profiting from market movement the times have changed for most traders. Today you need more than just EQ, or IQ, you need PQ or Pattern Quotient; seriously.

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Figure 1. Self-similar bullish fractal patterns in USDJPY in November of 2013

Pattern Ratio

Pattern recognition starts with one simple tenet: a market pattern can be definitively measured as either bullish or bearish. From that base we can categorize the different time frame patterns in a market as being bullish or bearish, and create a ratio to determine which markets to trade and which direction to trade them in. The ratio is dynamic of course because, as the different time frame patterns shift, so does the ratio. Think of it like a Rubik's Cube but much more simple. The tool is used to identify the direction of the majority of patterns, or the collective market direction, which tells us which direction to look for trade set-ups in.

Figure2. Pattern Ratio for USDJPY as of 11-7-2013

Pattern Benchmarks

A pattern ratio has multiple benefits beyond its own simplicity - it is based on simple math and is easy to keep up-dated by hand. Along with being helpful with trade selection, it also lends itself well to benchmarking, or statistical validation. By its design it defines a market's environment as bullish or bearish which makes it invaluable in measuring the effectiveness of trade management techniques in both trending and counter-trending environments. When the ratio switches to bearish the method only focuses on sell set-ups and sell signals, and when the ratio identifies the environment as bullish it only focuses on buy set-ups and buy signals. So it's left brained friendly - think of that less than exciting facet of yourself that likes emotionless facts and hard numbers, i.e.: your internal compliance officer. Yes, she will appreciate the ratio also because it is both constant and transparent.

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Figure 3. Patterns and ratio in EURUSD prior to Dec. '13 NFP release

In Figure 3 we see how the ratio was positioned prior to last Friday's Non-farm payroll number. While the news was initially Euro bearish no technical damage was sustained on the initial thrust lower, as even the shortest time frame support held, prompting a nice short-covering rally in line with the majority of patterns.

While many experienced traders instinctively understand that markets are fractal in nature and ruled as much by risk tolerance as underlying fundamentals, not a lot is written about this fascinating, and potentially rewarding subject, though we suspect as we move further into the decade that will change.

To see Jay Norris highlight trade set-ups and signals in live markets on Mondays & Thursdays go to: Live Market Analysis. Jay is the author of "The Secret to Trading: Risk Tolerance Threshold Theory".

Trading involves risk of loss and is not suitable for all investors.