You two are making this much more complicated than it is.
If while you're observing you note that a particular cluster of behaviors occurs often enough to be worth investigating, and if you notice that price behaves a certain way 80% of the time when this cluster is present, and if you backtest this phenomenon and find that it also pans out 80% of the time, and if you then forwardtest this and come up with the same result, and if you then simtrade it and your results are consistent, then you can assume that when you trade it in RT that this particular phenomenon will perform as expected 80% of the time. This of course does not work if the computer does it for you.
For example, yesterday, when price (a) hit the midpoint of the LT TC then (b) formed a DT then (b) moved sideways for an hour-and-a-half then (c) dropped below 16 then (d) retraced to 16, the probability was high that if I placed a sellstop below 16 that price would scoop me up on the way down. The probability that traders would suddenly decide to rocket higher late on a Friday afternoon was slim. But, if that had been in fact what they did, a scratch would mean the loss of a point or so. As it was, the trade was worth 50pts.
If every trade you take has a 50/50 chance of success, then your trading session will likely be anything but relaxed. But one of the primary objectives of observation, backtesting, and forwardtesting is to find those phenomena that demonstrate a greater -- preferably far greater -- than 50/50 probability of success. A retracement after a reversal or a breakout is one of these, depending of course on the context surrounding the reversal or the breakout.
If while you're observing you note that a particular cluster of behaviors occurs often enough to be worth investigating, and if you notice that price behaves a certain way 80% of the time when this cluster is present, and if you backtest this phenomenon and find that it also pans out 80% of the time, and if you then forwardtest this and come up with the same result, and if you then simtrade it and your results are consistent, then you can assume that when you trade it in RT that this particular phenomenon will perform as expected 80% of the time. This of course does not work if the computer does it for you.
For example, yesterday, when price (a) hit the midpoint of the LT TC then (b) formed a DT then (b) moved sideways for an hour-and-a-half then (c) dropped below 16 then (d) retraced to 16, the probability was high that if I placed a sellstop below 16 that price would scoop me up on the way down. The probability that traders would suddenly decide to rocket higher late on a Friday afternoon was slim. But, if that had been in fact what they did, a scratch would mean the loss of a point or so. As it was, the trade was worth 50pts.
If every trade you take has a 50/50 chance of success, then your trading session will likely be anything but relaxed. But one of the primary objectives of observation, backtesting, and forwardtesting is to find those phenomena that demonstrate a greater -- preferably far greater -- than 50/50 probability of success. A retracement after a reversal or a breakout is one of these, depending of course on the context surrounding the reversal or the breakout.
