That is a great question!!! Definitely a sign of maturation from experience.
Here is the deal, it is the real answer but is also difficult. There is a ton of BS in trading education. Honestly it is just horrific. A lot of what is on youtube is false too. However, there are essentially two parts to all of this:
1. Finding an edge.
- rules about how that process should appear
-risk management around refining that edge
- How to train an edge.
2. Psychology (actually this should all be considered under management of fear and uncertainty).
So many say, "I'm the edge". This is patently false and just stupid. The edge is "the edge", however one's vision may not see, understand, or be able to process the edge. In refining one's vision, one is simply working to "see the market as it is". Nothing more or less, and from THAT, the edge becomes more apparent.
However, the market revolves around uncertainty. There are counteracting balancing forces between buyers and sellers, and because of that, every trade has uncertainty around it. Let's say a trade has a 90% probability - - - what is the chance of losing 10x in a row? - - -
. IT ISN'T 0! However, traders want it to be 0! And that is the crux. [note easily calculable using Binomial Theorum] but essentially 0.10^10. Note a key factor of an individual being able to see 90%.
Therefore the first issue is seeing the edge, and the second becomes being able to operate and become familiar with the uncertainty of trading. The probability aspect of a trade, and managing the uncertainty aspect of a trade are not the same thing, and it is the latter that Mark Douglas work's to address.
But that brings us back to your question - - low probability events can and do happen. The nasty selloff of the markets leading up to the massive rally, that is two low probability events occurring and having one fueling another. How often does that happen? Not so often, but it does happen.
And that is the point, the best way to manage the unknown with respect to the probabilities of "this trade" and the risk of ruin because we are not going to always be correct. I took a loser this morning. It was a trap situation and I realized I was on the wrong side. When the buyers were taken out, another buy opportunity presented itself in a better situation, but if I had held the initial buy, it would have been a 2.5 point loss. Instead, it became a 1 point loss which became easy to make back soon afterwards.
So, as a long way to say this, the market is all about probability, and therefore we draw areas of S&R and channels to visualize what the higher probability situations often encompass. Yesterday's H, L, Close . . . etc are points of interest. However, we use local PA to define "what is happening now" and to understand where we are with respect to the market cycle. Trend -> trade it this way until it no longer is. Trading range -> this takes more experience because it expresses itself in many different varieties and ways (with lower probability too). Note, there are transitions between trends and trading ranges, and some of the quizzes cover this.
So the big picture frames state, and the local PA outlines direction, probability, and potentials. And sometimes low probability things happen, and we can see these and say "interesting". Often this becomes when there is unscheduled news and the market "shifts" or there is a quick reaction that isn't expected. It happens. However, with experience we see and recognize these aspects for what they are, and if trades present themselves, we know what to do.
Last point, "trades present themselves". This is based around an edge, and not how "we feel". So many are "looking for trades". . . . That isn't how this works and inhibits the learning process. What if a trade doesn't show up today? A trade isn't supposed to show up. This is a misconception based around trying to create certainty around an uncertain environment and event. And that is what makes trading very difficulty - - - when? Don't know, have to wait. How long? Still don't know. . . The edge exists around probabilities (note there are ways modify edges with testing and to work with lower probability too). How many trades will present themselves? Well, 1-2 very high probability trades are expected about every day. However on low probability days, they visually appear a little differently. Congestion on strong trending days isn't the same as congestion on a normal day. This takes discrimination though. Some alternatives become using other markets. How does one know when that becomes possible? What is the %Mack ratio and are the charts & decisions very similar? Note, this is with respect to working with a live market (don't have to trade it but can mark when would enter), vs Mack's chart. Why - because this is testing one's ability to read what is there. So many think Mack is marking afterwards. This tells me exactly how much experience they have. Does he mark some afterwards, yes because he may not have seen certain trades, and for those who took them, the probability may be there based on the context. However, it is all based on context.
One of the more useful exercises, having had experience of what context and targets are, is to work back through a bunch of charts to see how trends behave and how they appear and their variety. Then, run the simulation and see how they appear w/o the expectation of the "static chart".
. Often an enlightening exercise.
And to cap things off, as I have been reading quite a bit, a bit of truth I stumbled on again with respect to trading:
Don't ask why something happened. More appropriate would be to ask "what just happened" The reasons of "why" can change all the time, and be different every single time. . . Going to war the market has to go down. . . Might want to review 2003 again. "What" is apparent on the chart.
. Why is "made up afterwards" and isn't necessarily correct (because who can really verify?).
Hopefully helpful and good trades to you!
