Any more ideas, anyone, as to how and why it is possible for a simple positive expectancy game to arise and persist for retails to exploit in the given market reality?
-ras72
Human nature.
Price runs up and retraces. A swing high appears on the chart. Price runs up again, but pulls back from a lower high, printing a lower swing high. Mathematical calculations are made by automated systems, a trend line is drawn by manual traders. Price moves back up to that line in the sand, commonly called a resistance or supply line. Instead of pulling back from it, price breaks through it. Mathematical calculations are made by automated systems, the trend line is watched alertly by manual traders. Price pulls back to the trend line that previous acted as price resistance and pauses.
More often than not in the past, if this happened and price then started to move back up, it would move even higher and sometimes it would move higher and higher and higher.
Do I want to be the trader/algo/entity who fights a reaction that has occurred more often than not in the past? Do I want to possibly lose a lot of money doing this, and look bad in relation to my peers (other fund managers)? Isn't it more profitable in poker over the long haul to fold early when your hand sucks than to bluff?
So if price does X, fear of one sort or another (monetary loss, looking foolish) signals traders (and trading programs) to react by doing Y.
"More often than not" occurring in the past becomes a self-fulfilling prophecy for the same thing to continue in the future.
That is why certain price patterns in certain price environments can continue to have positive expectancy.
As for the beloved double bottoms and double tops, traders may feel that there's very little absolute risk in placing a limit order at a previous high or low with a tiny stop and hoping the previous high or low holds and triggers a reversal which could result in a significant reward for the small risk.
