Forex Trading – use probability and statistics to improve your Profits – Here's How

Forex Trading use probability and statistics to improve your Profits Here's How

Forex Trading Technical Analysis using Price Action

Prices on any Financial or Forex Market chart move up, down or sideways and dependant on the timeframe they could almost be doing all three at once!

Sometimes forex prices move off in one direction and tempt you into a trade only then to turn against you and take you out of the trade for a loss; price then goes off in your direction and turns out to be a great trade.. if only you'd have still been in the market!

So in this article I set out to see if there was a way to avoid what is, for most traders, one of the most frustrating things the market does. Sucker you into a trade, take your money, then do exactly what you expected and predicted

The trouble with the markets is that on an individual trade they are largely unpredictable. But, over 100 trades you start to see "clustering" of patterns, moves, and events. These become much more predictable than any single event and knowledge of these can, should, and usually does, greatly assist in being right with your trades "in the long term". And that is really all that matters because if you're right in the long term you will prosper. ( given that you get a few others things right)

So how can we get this longer term Price Information and apply it to our individual trades so that we're more right than wrong in the long term?

The answer is statistics

Now I know many people will at this point take the view that Statistics are just too complex and unrelated to the real world, and yes, statistics can in some cases tell you what you want to know rather than what you should know. But we're only talking very basic math here and it shouldn't get too complicated.

So let's start out with some truths that we know about the market:-

Price moves Up and Down.

Price only moves so far before moving to some degree in the opposite direction.

The price action can be summerised as a series of "zig zags" sometimes moving in an overall direction (a trend) and sometimes not (sideways or range-bound)

We could measure these "zig zags" and see how far the market "usually" moves in one direction before moving back the other way.

How would this knowledge help us?

Well surely if we knew that price usually moves 40 pips then moves in the opposite direction we would at least have an indication of where to put a stop loss. Maybe we could use it to help with a profit target. Maybe it would help with risk management.

It will actually help with all of these as we'll see however this is a subject that is much more easily explained in a video and I have produced exactly this for you to view here

http://fivetictrading.com/free-fx-information/using-maths-in-your-trading

The essence of the techniques is this:-

On any Forex (or Financial Market) chart draw lines from the Pivot High to the next Pivot Low, then from that Pivot Low to the Next Pivot High. This can be drawn manually or some charting packages include an indicator called "zig zag" that you could add. This should be done on the timeframe up from the one you intend to trade. So if you trade a 15 minute chart then do this on an hourly chart and so on. Also ensure that the lines are correct basically you need to make a judgement; if you were in a trade during the period of the line under consideration ask yourself, " would you stay in the trade all the way to the end of where you intend the line to ?" If there is a large enough move in the wrong direction that would in reality cause you to exit the trade then the line should be drawn to the turnaround point.

Now create a spreadsheet that has a column heading of "line length in Pips"

Back to the chart and measure each line that you have drawn, these by the way, need only be done for the times of day you actually trade the markets.

Enter each line length into the spreadsheet.

Repeat for 100 lines

You now need to do some programming as follows:-

Take a quick glance down the list of 100 line lengths what is the smallest and largest?

Let's say the smallest is 18 pips and the largest is 85pips. You need to split this range of numbers into approx 10 equal divisions. So in the case here start with a column of

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