All traders know how dynamic the financial markets can be…
It is difficult for traders to weigh the probability of ALL market forces precisely because price and the market are continously changing:
- Sure, the system you bought for $10 might do well for one month but can it handle a trend?
- Sure, the system you like guarentees 95% wins but is it realistic?
Often trading systems do well in a small window of measurement but they are not able to provide a consistent edge in the long run. This article will attempt to clarify what Forex traders can do to calculate and improve their odds when trading. Let’s start.
Difficulties with Probability Calculations
Traders are often focused on making sure that the current setup will end up for a win. They need and want to “be sure”. If there is anything that is sure when trading the financial markets, it’s that nothing is sure! Traders must force themselves to analyse their performance over a long period of time, like a month or quarter or year. Not 1 or 2 setups. This is valid for all types of traders, whether you are trading the Forex, CFD, commodities, and stock indices, etc.
Knowing the exact probability of one setup will therefore never be exactly known. But it is not something we traders should demand. Rather focus on short-term gains, it is recommended to analyse the long-term performance of your trading system or discretionary technical analysis and make sure to include at least 40 trades. That will provide much more information about your performance than trying to guess how one setup will end up.
Reviewing the long-term viability is always the best option because there are a ton of factors, which can change and impact your trading:
- Change in trend or lack of trend
- Change in fundamental analysis
- Change in technical analysis
- Market psychology change
The toughest part of a trader’s job is making an informed and balanced judgment while minimizing a trader’s bias… which is exactly the reason why we, at Elite CurrenSea, always recommend trading with a clear focus and mindset using 3 elements as our building blocks for analysing the markets at all times:
- Trend and momentum
- Support and resistance
- Price patterns
We call this triangle trading based on the ‘market structure’.
Signal hunters will not like this idea…
They prefer receiving trade ideas on a silver platter without any work. It might work out for a (short) while, but sooner or later the luck runs out and this type of trader will have no clue why. Market structure traders however do know how to analyse and adapt their trading plan accordingly.
How to Calculate Probability of a Forex Setup?
Signal hunters will never know when their system fails them as the market environment mysteriously changes. Traders who use the market structure, however, will also be adapt and ready for change. It’s part of our game plan, or better said, trading plan. Here are the key elements to keep in mind when trading market structure:
Step 1: is there a trend? What direction?
Keep in mind that the trend is very powerful. You want to trade with the trend unless it is showing signs of ending and reversing.
The presence of a trend is the very first step traders must always do but sometimes it will not be available. In that case, the market is ranging and going sideways.
It also a good practice to know whether price action is moving impulsively (quick) or correctively (slow). Quick price action is easier to trade as the momentum will translate into our trade hitting the targets faster too.
Step 2: where is support and resistance (S&R) and how strong is it?
Trading with the trend makes sense but not if support or resistance levels are nearby, because they can stop price from moving with the trend. S&R can decrease the probability of success of your trade setup, especially if there is a confluence of S&R because that will make the trend vulnerable. If the trend is stronger than the S&R, then of course, price is able to breakout beyond it and continue.
Step 3: what are the patterns?
Patterns are informing traders of the market psychology. Items such as wave patterns, chart patterns, candlestick patterns, time patterns, trend line patterns, Fibonacci patterns help traders digest the chart and understand the dynamic between trend, momentum, support and resistance.
For more information how trade the market structure, check out our ecs.SWAT trading system!
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