Thursday, April 23, 2015

The Probability Continuum

As a technical analyst, I closely watch the market price action on charts of multiple time frames. Using a variety of charting tools I have a specific method that I apply to identify where an ideal entry and exit point may occur.
The market will often move in very identifiable and predictable patterns over the course of time, which may offer excellent trading opportunities. On the opposite end of the continuum, the market may take on a very erratic and indecisive behavior that does not offer good trading possibilities. The market probabilities are continually sliding from one end of the probability continuum to the other offering very good trading opportunities at one end, while moving to a poor trading environment on the opposite end of the continuum. The idea in trading is to wait until the market invites you in at the high probability end of the continuum and to accept the invitation at precisely the correct time, based on your method of analysis.
That sounds pretty obvious, but here is the problem. The market is often very discrete! The market can move from one end of the probability continuum to the opposite end in a very smooth and subtle fashion. The market will move from a level of high probability to a level of low probability very rapidly without notice. As you gain experience in trading, it is critical that you have the ability to identify the subtlety of these movements or it will trap you.
For example, you may be watching market price action and decide that it has reached an optimal entry point for a trade you have been waiting for. Then you sit and wait and try to decide whether or not you should enter the trade. In the meantime, the market begins to move in the direction that your analysis suggested it might go. After the market rallies by 40 pips, you decide that you are pretty smart and it is a good trade. The market has now moved from a level of high probability to a level of lesser probability, but the psyche’ of your mind still views the trade as high probability, while the price level has

shifted to a level of lesser probability when you decide to place a trade. It is after you have placed the trade when you realize that the ideal entry price has passed, but you think you may be able to still profit from the trade, “if only the market will continue.”
You have now entered a trade at a level where you could have already taken some profit from the market had you entered at the high probability level. Further, you have now entered a trade that requires a larger protective stop loss and creating more risk, while offering less profit potential on your trade.
For ideal entries, you are required to be sensitive to the subtle movement along the probability continuum.

No comments:

Post a Comment