Evaluating Probabilities Using Technical Analysis

Besides technical analysis, I also use simplified statistical analysis made on the basis of long observation of the market behavior and study of its common laws. Many laws can be quite well explained from the common sense point of view, as well.

Such preliminary probability evaluation allows me to avoid the most common mistakes at opening and liquidating of my positions. The criteria follow.

• Usually, the probability that the market will continue its current movement in the present direction is higher than the probability that the market will soon change direction to the opposite.

Because the market has a high degree of momentum, the logical con clusion would be that opening a position in a current prevailing direction already gives a trader some statistical advantage of making a profit, rather than having a loss in such a case. However, even though it directly follows from one of the basic postulates of the technical analysis (the market moves in trends), many traders prefer to search for the opportu nity to catch the moment of the market transition from one direction to another, instead of going with the trend. My own observation shows that many novices intuitively feel this law and open the majority of their positions (in the very beginning of their trading careers) in a direction of a current market move. In fact, the less theoretical knowledge and practical experience a beginner has, the more expressed such a tendency is. Although they don't yet feel capable of predicting future changes in the market behavior and don't try to do so, they base their trading on what they see on the screen.


Because the FOREX market has a very high volatility, often such a tactic is justified and brings novice traders success during the initial period of their trading careers. This is why the overwhelming majority of the novices succeed while practicing dummy trading or even trading with real capital in the beginning. Unfortunately, this ability to go with the market soon disappears. Then it becomes substituted with analysis, mostly in accordance with knowledge received from books. Instead of simply following market fluctuations, traders begin to predict its future behavior and try to act in advance. From that point on, the majority of new positions are based on analysis and forecasts, and very often against the current market movement. From the moment strategy is shifted to mostly picking tops and bottoms, the chances to survive in business are sharply lowered.

From my point of view, the formula "sell on weakness, buy on strength" has an obvious advantage over another popular formula "buy low, sell high." The latter better fits a longer-term trader or investor rather than a short-term speculative trader, whose basic purpose is to enter and exit the market fast enough to get a relatively modest profit and then to secure it. In real trading conditions and especially in a day trade, it is much more difficult to define a point or even an approximate zone of a market turn, than to receive fast profit, catching the market on the run and opening a position in a direction of its current movement. Therefore, any trade tactics providing a position opening in a direction of movement (that already has begun) can be considered preferable in comparison with tactics focused on picking extreme market levels (tops or bottoms) to open a position against the prevailing direction at the moment.

• If the market had committed a significant move in some direction during the day, there would be a high probability of some extension in the same direction during the next day. The same assumption can also be used for analysis of weekly and monthly charts. See Figures 8.5 and 8.6.

The trend is one of the main market's features and occurs frequently. There is nothing unusual in this fact, and the FOREX market is famous for.



FIGURE 8.5 This is a very impressive sample of my statement: A strong and volatile move in one direction, with the closing price of the day almost at the very bottom of its range, continued during the next day. Despite the fact that the volatility of the third day was big, the closing price was closer to the top of the day than to the bottom, and therefore, no further extension is seen.