Trading using movements

As you know, in probability theory, it is said that the more an event occurs, the less likely it is to repeat; conversely, the less frequently an event occurs, the more likely it is to happen again. To better understand this, consider the following example:

Suppose in a city, a strong earthquake occurs once every 100 years. Now, if 20 years have passed since the last earthquake, the probability of the next earthquake happening is in 80 years; so there is no immediate concern, and there is still plenty of time. However, if 120 years have passed since the last earthquake, the situation changes. Not only did the earthquake not occur at the expected time, but it has also been 20 years beyond the expected period, so there is a concern that it might happen at any moment.

In the market, it works exactly the same way. One of the things considered approximately and probabilistically in the market, which we actually use practically, is this issue of movement. Some people think that when we say the market is a market of probabilities, it means the market is random, chance-based, or accidental; but that is not the case. The market is not entirely random and can be identifiable if we obtain the right clues from it.

So when we see a step and a correction in the market and there is no key level ahead to gauge the price movement based on it, according to the movement rule, we expect the price to move by the previous extension amount ±30%. This means we want to enter a trade where the price has moved this amount so far, similar to the previous extension, and we expect such movement in the next price movement. Suppose we want to enter a trade where the price has moved a bit and we notice that the amount of movement (represented by the black line in image 1) is very small compared to the total movement it could have. Thus, the probability that it will continue its movement is very high. Therefore, this is a low-risk trade, and we still have the opportunity to enter the trade.

However, if at the same market position, the price has moved more, for example, to the extent of the black line in image 2, we realize that this is a high-risk trade and we should not enter this trade. Even if we haven’t entered and see in the following days that the trade we didn’t take would have been profitable, we shouldn’t regret it, as we did the right thing. The first step in financial markets is to preserve capital.

So, one of the uses of movement is that the less the price has moved from its total movement (which is the average of market movements) when we want to enter the market, the lower the risk and cost of the trade, and we can trade with greater confidence and even a larger volume. However, if the price has moved a greater percentage of its total movement, this becomes a high-risk trade with a higher probability of price reversal and the formation of a correction, so in such cases, we do not trade at all.

So far, we have understood that one application of the movement rule is targeting; that is, assessing our entry point relative to the target price we expect. Another application of the movement rule is examining the financial strength of traders in the direction of the trend, just as we assess the financial strength of traders against the trend by analyzing depth.

According to the image below, in the first extension, a continuous movement with an initial movement phase has been formed, and the price starts to move again after the end of the correction to reach the target based on the first extension movement. The difference between these two movements in filling market extensions is that the first extension covered this path with a continuous movement, while in the second extension, the price could not maintain a continuous movement. Instead, after a short movement, it rested briefly, made a short correction, and then continued its movement until reaching the end of the movement.

Now, if we compare the financial strength in the second extension with that in the first extension, we see that the financial strength in the second extension has decreased. The interpretation of this is that traders in the direction of the trend have become weaker in the market

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