You may have heard us say at some point that there is no such thing as a trading holy grail. What we mean by this is that there are no trading approaches or systems that are 100% effective, allowing you to extract money from the markets at will and without risk (btw, if they did exist, no one would let you know about it).

So….if you come across someone promising a fool-proof system to follow, our advice is to run.

The only thing that is certain in trading is that it is uncertain. So, as traders, the best we can do is to subjectively define risk/reward based on hypotheses in the auction. Fortunately, since financial market fluctuations are based on human behavior, we can develop approaches to markets that have some degree of predictability.

When we statistically extract these behaviors, we can even create probabilities around behavior, allowing us to quantify the success of our trading ideas. We believe that if we can wrap a probability around the success of an outcome, that is an edge that we can use. It’s not a holy grail, but it is something that we can lean on.

To illustrate, see this chart. What it tells us is that over the last 1000 trading sessions in Nasdaq futures there are behaviors that we can see with respect to the price range of the 1st hour of trade (we profile traders call this the “initial balance”.) Here’s what we learn:

• 408 out of 1000 sessions we only extended the initial balance higher
• 306 out of 1000 sessions we only extended the initial balance lower
• 230 out of 1000 sessions we extended the initial balance in both directions
• 56 out of 1000 sessions we didn’t extend initial balance at all

So, from these results we can ask some interesting questions that will hopefully create some “aha” moments for you:

• 70% (408+306/1000=70%) of the time, when Nasdaq futures extend the initial balance, they only extend it in one direction. So, if you see range extension in one direction, what does that mean for the rest of the session?
• 5.6% of the time, Nasdaq futures remain completely inside their initial balance. So, if you are sitting at your screen and you see Nasdaq sitting inside the first hour range, what’s the likelihood that it will remain there?

This is just a start of the types of thinking that is possible when you begin to wrap statistics around your trading. Hopefully, this spurs some ideas that you didn’t have before. BTW, these types of statistics can be pulled for any trading vehicle: stocks, futures, forex.

It’s not a holy grail, and it’s not certain, but when we can quantify the likelihood of something happening, that is an edge. As traders, that’s the best we can do.

Trade well,

Josh & the TWP team

ps. We reserve some slots each week to offer free 30 min consults with traders. They are first come/first serve. Use this link to pick your time.

Notice: Derivatives trading involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.