Putting the Probabilities On Your Side

By: Ray Barros

Before I start tonight's blog I'd like to:
1. Thank Ana for stepping in. Not only did she write my blogs but was very helpful when I had to spend a night in hospital. I am glad to report all is well with my health.
2. Apologise to John Forman for mispelling his name. (now corrected)
Ok, let's look at ‘putting the probabilities on our side' when trading.
In my view the key here is identifying the trend of the trader's time frame (i.e. the time frame we are trading) and answering the question: "Is the trend likely to continue or change?". The answer to the question provides us with our trading strategy - to be long or short (or to stand aside when we are unable to form a firm conclusion).
If markets weren't fractal, then the answer to the question above could be answered by almost any trend indicator: moving averages, ADX, Katsanos' Congestion Index, the Vertical Index etc. But markets are fractal and hence, a retracement in a higher time frame tends to produce at least an attempted change in trend in the lower time frame. However, once the higher time frame correction is completed, the lower time frame change in trend will abort.
Figure 1 is an example of what I mean. It's a Gold chart.
The ‘failed H&S' pattern occurred in Sept to Nov 2005. The monthly trend corrected, and the weekly trend signaled a change in trend to the downside. However, shortly after the breach of the neckline, the monthly trend resumed its uptrend, thus causing the weekly change in trend to fail.
Barros Swings provide us with a means to avoid some of these losses. Barros Swings warn us when a time frame's trend is statistically in ‘danger territory' i.e. may change its trend. It provides us with the change in trend patterns that confirm the change in trend. The great thing about the patterns is one of the four main patterns (called Lagging Change in Trend Patterns in Nature of Trends) must take place in any change in trend.
An important point to bear in mind as I run through this series: just because a trend is statistically in ‘danger territory' does not mean I am advocating a contra-trend trade - all I am advocating is avoiding a with-trend trade. I need to see a change in trend to go against the prevailing trend.
Tomorrow I'll look at Barros Swings in greater detail.

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