How Recognizing Dominant Patterns in the Market Improves Your Trading Decisions 

Understanding patterns is one of the most valuable skills an investor can develop—and one of the least taught.

Every day, we are bombarded with data, opinions, headlines, and forecasts. Most of it is noise. What truly matters is the ability to recognize the dominant pattern behind any situation—the factor that explains most outcomes.

When investors fail to identify the dominant pattern, they waste time, energy, and capital focusing on secondary influences that rarely drive long-term results.

To understand how this works, let’s begin outside of finance.

Understanding Patterns in Everyday Life

It is common wisdom that good nutrition and regular exercise are essential for children to grow up healthy. And of course, they are.

But if a child plays basketball every day and eats perfectly, will that child become dramatically taller than their parents?

Probably not.

Why?

Because the dominant pattern for height is genetics, not lifestyle.

Nutrition and physical activity matter—but mostly at the margins. Severe malnutrition can stunt growth, but normal variations in diet or sport usually do not change a person’s ultimate height.

Many factors influence outcomes, but only a few truly dominate.

Pattern Interpretation vs. Pattern Misinterpretation

This distinction is crucial.

Patterns are generally true—but they are only true on average.

There will always be exceptions. Some children grow far taller than their parents. Some people respond unusually well to training. Outliers exist.

But when we look at large populations, the dominant pattern asserts itself:

Children, on average, end up roughly as tall as their parents, regardless of whether they grow up in Alaska or Florida, rich neighborhoods or poor ones.

Understanding this prevents us from confusing coincidence with causality.

Playing basketball will not make you taller. Exercise may help you become healthier and reach your genetic potential—but it will not rewrite your DNA.

Miracles can happen. Betting on them is foolish.

Dominant Patterns in Financial Markets

Markets work the same way.

Investors constantly search for explanations: headlines, geopolitical events, political drama, expert opinions. Most of these are secondary factors.

The key to better decisions is identifying what actually drives outcomes.

Case Study: Inflation and Money Supply

The inflation surge of 2021–2022 offers a perfect illustration.

At the end of 2022, many investors were convinced that inflation would remain high for years. Commentators spoke of “structural inflation,” wage–price spirals, and a new era of permanently rising prices.

The reasoning was simple—and wrong:

“Inflation is high, therefore inflation will stay high.”

But this logic ignored the dominant pattern.

As Milton Friedman famously said:

“Inflation is always and everywhere a monetary phenomenon.”

The primary driver of future inflation is not past inflation.
It is not consumer psychology.
It is not what analysts feel or fear.

The dominant pattern is the amount of money in circulation.

By late 2022, money supply growth had already collapsed. Liquidity was tightening. The monetary fuel that had driven the 2021–2022 price surge was disappearing.

As a result, inflation fell sharply through 2023 and 2024—confounding the majority of dire predictions.

The lesson was clear:

Focusing on headlines and recent trends led investors to expect more of the same. Focusing on the dominant pattern—money supply—gave a far more accurate picture of what was coming.

The Weight-Loss Analogy

Consider another simple example.

The dominant pattern for body weight is not how much weight you gained or lost recently.

It is whether you are in a caloric deficit or surplus.

If you consistently consume fewer calories than you burn, you will lose weight. It does not matter how much you gained last month or last year.

Markets behave in a similar way: short-term trends and emotions feel important, but the underlying mechanics ultimately dominate.

Dominant Patterns in Equity Markets

Let’s turn to investing.

In US equity markets, one of the most reliable dominant behavioral patterns has repeated for generations:

“Be greedy when others are fearful and fearful when others are greedy.”
— Warren Buffett

This sounds like a clever slogan, but it is actually a description of a powerful and measurable market pattern.

When sentiment is extremely negative, future returns tend to be above average.
When optimism becomes euphoric, future returns tend to be poor.

At the end of 2022, consumer expectations were near multi-year lows and market sentiment was deeply pessimistic. According to this dominant pattern, such conditions typically create favorable entry points for long-term investors.

That is why, as we wrote in our earlier article Economic Outlook for 2023: Don’t Forget Your Sun Screen, the depressed level of consumer expectations led us to conclude that markets were more likely to rise in 2023 than fall.

Sentiment as a Dominant Pattern

At the start of 2023, consumer expectations were near multi-decade lows. Recession fears were everywhere. Financial media was overwhelmingly bearish.

The dominant pattern suggested the opposite of the consensus: markets were more likely to rise than fall.

And that is exactly what happened.

Equities rallied strongly through 2023 and 2024, despite ongoing pessimism. Investors who followed sentiment rather than headlines were rewarded.

You don’t need to manually count bullish and bearish commentators on television. Broad measures of consumer and investor expectations already capture what Warren Buffett meant by “others.”

As a group, investors often behave just like average consumers—driven by fear at lows and excitement at highs.

Why Dominant Patterns Matter

History is full of brilliant people who lost fortunes because they ignored this reality.

Isaac Newton, one of the greatest minds in human history, was ruined by the South Sea Bubble because he followed emotion instead of pattern.

Intelligence does not protect investors from misinterpreting markets. Understanding patterns does.

Markets do not move randomly. They are shaped by recurring human behaviors and structural forces.

When consumer confidence collapses, when liquidity is abundant, when positioning is lopsided—these are dominant patterns that tend to overwhelm day-to-day news.

The “Pain Trade” Principle

One of the most reliable market patterns is the so-called “pain trade.”

Markets often move in the direction that causes the most discomfort to the largest number of participants.

When everyone is positioned for disaster, markets frequently rise.
When everyone is convinced prices can only go higher, markets often fall.

Not because of conspiracy or manipulation—but because expectations themselves become the dominant pattern.

Bringing It All Together

Whether we are talking about:

• genetics and height

• calories and body weight

• money supply and inflation

• sentiment and stock prices

…the lesson is the same.

Most outcomes are driven by a small number of powerful forces.

Everything else is noise.

Final Thoughts for Investors

As we move deeper into the second half of the decade, the investing landscape continues to change—new technologies, new crises, new trends.

But the core truth remains:

Successful investing is not about reacting to every headline.
It is about identifying the dominant pattern and having the discipline to follow it.

Patterns repeat because human nature does not change.

Learn to recognize them, and your trading decisions will improve dramatically.

Ignore them, and you will forever be chasing shadows.

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