“Trading is just a probability game based on pattern recognition”
(taken from italianfx email)
If every potential trade is a probability game, the job for a trader/scalper is not forecast the future but to minimize risk using every available tool to find the best available scenario.
1. The importance of order in the analysis
. In mathematics the order of the factors doesnt changes the result (5 x 8 = 40 and 8 x 5 = 40). However, when trading the order of analysis change everything.
a. If you only focus in how to pull the trigger (“timing” i.e LT rainbow, Stoch Crossover, MA Crosses, CCI, etc ,etc ,etc ) you can have some results especially in trendy markets, but you are doom to fail in the long run.
b. If you only focus in “direction” you will have 95% hit rate but only in your head ‘cause u will end up getting stopped out every single time, full of loses because whipsaws or caught with million doubts every time a S/R or trendline is touch or broken.
But before analysing DIRECTION, TIMING and MOMENTUM...
2. Price moves in Waves.
Regardless of the instrument and timeframe and despite of the market direction or its condition (in a trend or in a range) markets always move in waves. That’s why the Elliott Wave Theory and its followers. But we scalpers are not interested in counting waves or forecasting the next possible move but in minimizing the probabilities of a bad trade.
a.What we don’t know about waves:
i.The exact beginning or end of a wave
ii.The potential height of the next wave
b.What we know:
i. Where we have less probabilities for a successful trade regardless of the direction or condition of the market
c. Have u ever wonder why you end up trading the death lows or highs in a trend (in Rainbow terms even if is a clear trend and the spine is align and the flame just broke the last H line…) … Your analysis might be right, the direction, condition and timing might be good but you are playing a low probability trade because you are forecasting that next wave is going to be a lot deeper than the previous one when statistically this is not true.
3. The first factor for a scalper is to understand in which part of a wave is the market. Not using a statistical method but using common sense (sadly the least common of the senses). Before you analyze trend S/R lines, Direction, Timing, Momentum and despite the drawdowns, etc a trader should ask himself in which part of the wave is the market. The only rule of thumb is the later you enter a new wave the less probabilities you will have to be successful. (this a BP example in different timeframes smoothed with a LSMA for explicative purpouses)
4. Look at the EUR/USD daily forex example below. If we have just traded without any further analysis the beginning of a new green wave we would have make millions. On the contrary if you have waited until price breaks resistance you still will have make some pips (because is a big trend) but you are not playing high probability trades… I can post 1 millions of example like this in any timeframe but my point is not that you should focus only on waves but that you, FIRST have to recognize where not to place a trade even if it follow the direction of the market