Probability

Most are aware that I took losses at the end of Trump week. No blame to the US president-elect, the responsibility is all mine. Ironically, it came after my boastful ‘fulfillment’ blog. Hey-ho.

Losses always take ten times longer to make back. But they’re lessons we’ve paid for so we should heed them. To that end, the basics of what we do have not changed; however, entries and targets most certainly have changed.

We’re all familiar with the concept of risk and reward. However, we rarely consider the third equal partner – probability. In general, the smaller the risk, the lower the probability.

Therefore, we’ve increased managed risk but also increased the chance by taking trades that meet our “probability” criteria; this is not the trend, but a trade made with the context in the direction of a trend bar that has broken a premise point.

Here’s an example from yesterday of what I mean:

snip20161203_1

Left of the frame is a downtrend with a classic three push down. Three measured drives usually indicate a reversal. Previously we’d be looking to take the bottom of bar number 1 long, as it’s the third leg down. However, bar number 2 was a ‘final flag’ or a final extension down. Our stop may have previously been set close below bar number 1. Low risk but also a low probability trade. In this example, we’d have been stopped out at bar number 2.

We now, as we did yesterday, enter the trade long at the top of bar number 3. Arguably a higher risk but higher probability entry. We can see that this bar has also closed above a line of the premise. Or, above the previous top bars to the left.

The red dashes are my measured targets. My target was close to the top of bar number 5. However, in this instance, I came out earlier as bar number 5 was news based US monthly non-farm payroll announcement – and they can be quite another thing.

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