Probabilistic Thought Process In Currency Trading

This is a trading week that can objectively  exemplify how one can trade using probabilities. With just four (now 3) trading days left, many currency pairs have above average monthly trading ranges.

Lets take EURUSD as an example. The EURUSD pair has completed around 65% of its average monthly trading range already. Therefore, there is still a good probability that EURUSD is going to complete its average monthly trading range towards one side or the other (expanding above the high of the month or below the low of the month). By mere observation, one can tell that the pair has a bullish principal move. It has been moving north(bullish) for the most part of the month. It shouldn’t be hard to observe that. By making another observation we can tell that, as of now, price is sitting way closer to the top of this months range: just grab your fibo tool and connect it from the bottom of the month towards the top of the month and see how price is related to 50% of the range.  With the notion that price has a tendency to fulfill an average range for any given time (day/week/month/year), that there is still time (short amount of time) to fulfill its monthly range, that price is clearly trending up for this month and that price  is currently sitting much closer to the top of the range, it’s easy to assume that the EURUSD pair has an above average probability that it will expand above the high of the month.

As a currency trader, I will be looking only for long trades. I will also be only seeking those trades that truly have the potential to take out the high of the month and expand above it. It simply would make no sense to take short trades because it would mean that I would be trading against the odds previously established by the statistic and probabilistic observations. It would also be regarded as senseless to take trades that had little or no potential of expanding the range. This would mean range trading or trading inside what is regarded as trading inside the noise.

I want to make it very clear that by only taking long trades on EURUSD doesn’t guarantee that all the long trades that are taken will be successful. However, it does mean that you will be taking positions with the odds in your favor: where does price have a higher probability to move to?

I would like to ask the reader to perform the same analysis/observations on the USDCAD pair. How much of the average monthly trading range has the pair covered? Is the main move of the month bullish or bearish? How far price is sitting in relation to the top/bottom of the monthly range? Does the average daily range for USDCAD provide a viable intra day trade that would mean a future monthly expansion?  Once you have answered the previous questions, do the final analysis: Which direction does USDCAD have a higher probability to expand? Should I take LONG or SHORT positions or it doesn’t matter?

Try to do the same with different pairs.

Also, try to fit this thought process with the ‘boat exercise’ posted previously on this blog. A trader, just like the captain of the boat,  must be able to combine as much elements(wind direction/wind speed/distance/timing… etc.)  in his/her favor to have a true edge.

Thinking in probabilities, is an invaluable asset for any trader.  I truly see it as an edge.

You don't really need to draw a single line on your chart to make smart trading decisions. ;-)

Hope you have a blast!