Trading using movements
Trading Using Movements: A Probabilistic Approach to Market Trends
In the world of trading using movements, understanding probability theory is key to making informed decisions. This principle suggests that the more an event occurs, the less likely it is to repeat soon—and this logic can be effectively applied to market trends
In the world of probability theory, a fascinating principle suggests that the more an event occurs, the less likely it is to repeat in the near future—and vice versa. This concept has practical applications in many fields, including financial markets. To understand this better, let’s start with a simple analogy.
Understanding Probability Through Real-Life Examples
Imagine a city where a major earthquake occurs approximately once every 100 years. If only 20 years have passed since the last earthquake, it’s reasonable to assume the next one won’t happen for another 80 years. However, if 120 years have passed without an earthquake, the likelihood of one occurring soon significantly increases. This principle of probability applies similarly to market movements.
The Market and Movements: Random or Predictable?
Many people misunderstand the probabilistic nature of the market, believing it to be entirely random or driven purely by chance. However, markets are not completely chaotic. By analyzing market patterns and movements, traders can uncover valuable clues about price behavior
The Rule of Movements in Trading
One important concept in trading is the rule of movements, which involves analyzing price steps and corrections. When the market lacks clear key levels for gauging price movements, traders rely on the average of past movements. Typically, we expect the price to move by the previous extension amount, plus or minus 30%.
For instance:
- If the price has moved a small distance relative to the total average movement, the probability of it continuing in the same direction is high. This presents a low-risk trade opportunity.
- Conversely, if the price has already moved a significant portion of its potential range, the trade becomes high-risk, with an increased likelihood of price reversal or correction.
Analyzing Low-Risk vs. High-Risk Trades
To illustrate, imagine entering a trade when the price movement (represented by a black line in Image 1) is minimal compared to its total potential movement. In this case, the chances of the price continuing in the same direction are higher, making it a low-risk trade.
On the other hand, if the price has already covered most of its potential range (as shown in Image 2), the trade carries higher risks. Entering such trades increases the likelihood of facing a reversal or correction, and prudent traders avoid these situations.
Preserving Capital: A Key Principle in Trading
A crucial rule in financial markets is capital preservation. Even if a missed trade turns out to be profitable, there’s no reason to regret the decision. Avoiding high-risk trades is always the right approach, as it minimizes unnecessary losses.
When entering the market:
- If the price has moved only a small portion of its total range, you can trade confidently and even increase your trade volume.
- If the price has already moved a significant percentage, the risk of reversal is high, and avoiding the trade is a smarter decision.
Applications of the Movement Rule in Trading
The rule of movements has two primary applications:
1.Targeting and Entry Assessment: This involves analyzing the entry point relative to the target price, ensuring a low-risk trade.
2.Evaluating Financial Strength: By comparing the financial strength of traders along the trend, you can gauge the market's stability. For instance, the financial strength in a continuous price movement differs from that in a fragmented one.
Continuous vs. Fragmented Movements
Consider two price extensions:
In the first extension, the price follows a smooth, continuous path until reaching the target.
In the second extension, the movement is fragmented, with short corrections and pauses before reaching the target.
Comparing these, it becomes evident that financial strength diminishes in fragmented movements. Traders following the trend in the second extension are weaker compared to those in the first.
Key Takeaways for Trading with Movements
1.Probabilistic Analysis: The rule of movements allows traders to assess risks and probabilities effectively.
2.Low vs. High Risk: Prioritize low-risk trades by entering when the price has minimal movement remaining.
3.Financial Strength Evaluation: Monitor market momentum and strength to avoid entering trades at vulnerable points.
By mastering the art of analyzing market movements, traders can make informed decisions, minimize risks, and maximize profits. Remember, trading is not about luck—it’s about understanding the patterns and probabilities that drive the market.
