you did not ask me this question but here is some food for thought: the probability does not change whether it is first set up or the 100th. that is pure theoretical probability.
however in market the probability of a set up reduces with each set up because a set up will work in a trading range or in a trend....but may be , not in both...
if it is set up, designed to work, in both, then go ahead and trade.
if the set up does not work for both these market conditions then the more times it works and gives you money the probability of it working will reduce because the probability of the market conditions changing increases.
you can assess the market and see if it is likely that market conditions are likely to change if you are so inclined and use your personal knowledge and experience to decide.
this is not advice but is my personal experience....in my dreams... because I have never used set ups to trade with.... in my life
You make a valid point. For instance, look at the market phases or cycles. BO’s to Channels to Ranges. Then it does the same thing again i.e. BO from Range..then usually some sort of channel then some sort of Range.
Now I use certain tactics for trading in each cycle or phase. So...let us say i am trading two or three tactical setups in a range. As time goes by I am trading my setups and the range is getting longer and longer. Now I know that the next thing that will happen is some sort of BO of the range. It may be a one or two large bar spike like a rocket taking off then morph into a channel or it may be a BO in the form of a tight channel that morphs into a broad channel. Or it may just go from a slow nothing special breakout into a broad channel that very soon becomes a range. Or it may BO with a few bars (micro channel) then immediately morph into a range and after it happens it looks like it just stepped from one range into another range. Stair stepping into ranges. My point is there is going to come some sort of breakout. Institutions are going to start it and drive it. Price is not always on any one time frame gonna stay in a range. Although price is ALWAYS at ALL times in some sort of channel or range on some time frame. It may be in a channel on a 5 min TF but a range on a 60 min TF.
So...let us say I am trading a range on a 5 min charge using like I said two or three different setups. The further the range goes and the longer it continues the probability that the range will continue, as Padu alludes to, gets smaller. Since I am using and trading setups designed to exploit range PA as time goes by with price in a range I am in effect seeing a reduction of probability that the setups will work. Said another way, there is an increasing probability that one of them will soon fail as a BO is forthcoming. In that since Gann was right about TIME being a factor in the markets. Think about it.
So, I am trading in range. As time goes by the probability of a setup failing is increasing thus the probability of it working is also decreasing because of the market cycle phenomena.
So, I can do one of two things. I can quit trading in the range once my profit target for the day is made and stop for the day before the shift in the market phase or cycle begins. Or, I can keep trading the range after reaching my daily profit goal and just be ready to employ a different set of tactics when the market cycle changes. But, it is often in that that transition period from range into BO into channel and back into range that traders will give up profits made earlier. Why? Because the transistion is not always readily visible to the eyes until it has been made. For instance, PA is in a range. That is all I know and see.
Suddenly, there is a three bar bull BO spike made on large bars with gaps between the close of each bar and the close of the prev bar or other types of gaps. So, I am thinking BO. I got to get in. So, I take a position. That is logical and correct as the odds favor at least a second leg up or a measured move up (height of the spike) after any PB and as the spike transitions into a channel. BUT suddenly the spike ends right after I take a position and a reversal occurs wiping out 3/4 of the spike and suddenly quicker than I can intone yankee doodle dandy and dream of $$$ falling out of the sky into my account i find my position under water. What? This isn’t supposed to be happening. The dang market is supposed to go up for a measured move! LOL. Now I am singing there is a tear in my beer.
Now REMEMBER THIS.
When what is expected to happen doesn’t happen and the UNEXPECTED happens then something is going on in market pressures that is not yet completely visible to the naked eye. When the least probable event happens then you have employ other things of a tactical nature to exploit that PA. In this case, the market probally went from a spike BO into an immediate broad channel and the reversal is the deep pb (and second leg) of the begining broad channel or the market is quickly transitioning into another range. After the fact, as time moves along and more bars are formed it becomes clear that the spike BO from the original range has simply become the first leg up in a broad channel or subsequent range. Nevertheless, I was correct in playing it as a BO (with at least a second leg up after any pb) for a measured move. Why? Because the odds favored that scenario.
But, on that deep reversal down that “more probable” anticipated PA did not pan out and I was stopped out on that deep PB. Suddenly after that deep reversal down, after the spike BO, ANOTHER reversal but now “up” takes place. WHAT? Now I am really pissed (to no avail) thinking I was right, now we gonna get that measured leg up. I was right but alas I am stopped out. So......i enter again. Market reaches to the top of the original spike and BAM reverses back down AGAIN All the way to the bottom stopping me out for a loss twice. The dog gets another piece of firewood thrown at him...he hates trading days (just kidding I don’t have a dog..LOL).
By now i see what has happened. The spike up out of the original range was simply the first leg up in a subsequent, yet to come into being, second range. The unexpected happen. There was a 70% chance that the spike would give me a second leg up but instead the 30% event happened. Thus goes the market. In hind site it is all very clear. But when it was happening it wasn’t so obvious and I took two losses before I recognized what happened. So I attribute it to noise or chop and drink three more warm bears ...very fast..to dull the pain abit. So, how could I have avoided two losses? Think about it.
The answer is a larger SL to save my hide in the transition period. Remember that spike? Well my SL needs to be at the VERY min the start of that spike up (top of the original range) but preferably a better SL just outside the bottom of that original range. If the proper SL is took big for ones taste then don’t take the BO trade. See, BO’s need large SL’s. Yes large risk. That is opposite of what most traders think. But most traders are not cognizant of the market cycle and it’s transitions. So in a BO they reason they can use a tight stop. BIG MISTAKE! Maybe a tight stop worked before but that doesn’t mean it will generally work in BO’s. The market can do the expected event but it can also do the unexpected event. I, as a trader, have to be ready tactically for either. So, I trade the spike BO based on the higher probability event but in case the market does the lower probability event I am tactically ready for the lower probability event with a large SL. So I get out at BE or a smaller profit than originally anticipated and/or I dip into my tactical tool box for trading ranges and I trade the spike BO as the first leg in a subsequent range or channel and may add to my position on that first deep Pb that wiped out 3/4 of the spike. In essence loading up for a move back up to the top of the new range (top of the spike) or the top of the new channel.
All this to say, yes, Padu is correct. Odds that my setups will fail in that original trading range do in fact increase as time goes by so I must be ready for a transition to a BO with all my tactics at least mentally, in the forefront (until I see what happens) with the BO spike. OR, I make haste and quit trading for the day as my profit target has been reached in that original range trading. So...yes simplemelikes brings up a valid concern too.
