In his post Common Mistakes Traders Make - Acting Before Understanding , Dr Brett Steenbarger writes traders make the "cognitive mistake (of trading) patterns or "setups" without truly understanding how their market is behaving".

Let me give you an example from today's trading. For context, my trading provides liquidity to traders on the wrong side of the market. I take on inventory at one price, and offer it to traders exiting losing trades at a difference to make a profit.

As a trader, I can confirm that solving the trading puzzle is the root of making money trading. Thus, my problem to solve each day is which traders will get caught on the wrong side of the market?

I only trade 6A futures, so I'm familiar with it. Coming into today, I knew the following:

1. There has been no material change in commercial positioning (their views haven't changed).

2. The rate at of appreciation in 6A since the February lows has slowed (based on a proprietary study).

3. 6A has remained resilient in the face of recent "risk-off" market movements.

4. Intraday failures to move higher is often met with short sellers " top-picking”. It's unusual to observe a skew to aggressive buyers instead.

   
   

Has 6A resilience attracted traders from alternative "risk" assets in search of returns?

If so, this would explain the unusual long inventory referenced above.

These buyers are unlikely aware of the internals to slowing appreciation.

These buyers are the group I'll look to catch on the wrong side of the market.

But, I still need to determine what will motivate these buyers to exit. For example, are market themes "in-play" leading to the conviction to stay with their trades? What other factors do I need to consider? And only once I have these answers does trading involve patterns and setups.

I don't use well-known chart patterns because they have no edge. I combine pieces of evidence incorporating order flow, value, tape-reading, market themes, VWAP calculations. See live trading examples here.

My patterns serve to:

1. show my idea is working

2. show my idea is complete

3. show my idea is no longer working

4. enter the trade and have it move onside immediately

5. enter the trade with only a tight risk level needed to prove the timing is wrong

6. guide me to when I can add size, take partial profits, etc.
   

Trade ideas are only degrees of accuracy. The market is too challenging too solve. Yet, this is enough to profit when you turn to your patterns and setups that have an edge. You profit from the idea for as long as that idea plays out. And you'll be out of the market when it's no longer working.

TL;DR

Problem-solving determines your trade idea.

Patterns and "setups" are for executing that idea while also managing risk and sizing.

PS. Dr Brett's article finishes with “Great traders don't have a passion for trading; they have a passion for understanding markets. That's what makes professional trading different from gambling”.