One of the essential breakthroughs we need to make in our journey involves learning to think in probabilities.
It's something that all traders say they understand. But, for most new traders, their behaviour and decision-making shows that it has not been accepted.
This came to mind when I received the following email question:
– – – start of email excerpt – – –
I’ve circled the “Spike Low”. You can see from the Volume that it spiked as well…. my understanding is that this is a “test” for higher prices. When I’ve observed this very thing (over several years) Price Action “always” moves HIGHER… Today, it Moved LOWER and wanted to educate myself on WHY…
Else, maybe I have the whole thing wrong…
If you can comment and/or direct me to something on your site, that would be great.
– – – end of email excerpt – – –
Here's the chart using my usual display format. I've added a higher timeframe support level and positioned the spike at the right hand side.
And zooming in to the spike itself…
The question again – "When I’ve observed this very thing (over several years) Price Action “always” moves HIGHER… Today, it Moved LOWER and wanted to educate myself on WHY…"
My big problem is with the word "always". Yes, it's in quotes. But it still concerns me.
Here's an excerpt from my reply (noting that at this stage I had no idea of the market or timeframe and was replying based upon the original black-background chart image above).
– – – excerpt from my email reply – – –
I can't really answer as to why this move went lower, being unsure of which market and timeframe and whether this price move coincided with any news event (planned or unplanned).
Typically we can't ever know with complete certainty the reasons for any price movement. Price moves where it does based upon the orders that hit the market. Why did it go lower? Because the net effect of all the orders was bearish. Any discussion as to why trade decisions were net bearish, is simply speculation.
The error in your thought process is when you use the word "always" in this sentence – "When I've observed this very thing (over several years) Price Action "always" moves HIGHER."
Does it really always move higher? Or were there actually some occurrences where it moved lower?
We're dealing with probabilities, not certainties. Nothing "always" happens.
Even if this was a 99% probability of moving higher (which it's not because nothing is that close to certain) then there would still be 1 out of 100 cases where it moves lower. This example was that 1 occurrence.
Let's say the pattern has actually 55% probability of moving higher, which might be more realistic. This example then simply sits on the 45% side.
So it's nothing unusual. And nothing that needs understanding "why".
What is important is firstly that you shift your thinking away from certainties to probabilities. And secondly, that if you're trading something like this and take a position LONG in expectation of movement higher, that you recognise as quickly as possible that this occurrence is falling on the losing side of the probabilities, and you adapt quickly and get out.
"Why" is not important. Recognising and adapting is important.
– – – end of reply – – –
Subsequent discussions confirmed the market as EURUSD, 1 minute chart, on 26th November 2018.
So let's finish up with two additional important points:
1. Knowing the market, date and time, I was then able to confirm that the price spike occurred just two minutes after 09:00 US Eastern Time (two minutes after midnight my time). Two minutes prior to that spike there was a scheduled speech by the ECB President. Given the high-impact potential for such an event (especially given the current Brexit negotiations) it's reasonable to expect that such an event could completely shift the sentiment in the market, rendering any prior analysis and levels as irrelevant. Just something to consider!
You have to be aware of scheduled news events. You can find the economic calendar I currently use on my Resources Page – http://yourtradingcoach.com/resources/
2. For those interested, I actually have no problems with someone entering LONG from that spike. The following are my thoughts regarding the price movement following the spike, looking purely from a price action perspective.