We need a map
An essential step for a trader aspiring to succeed is to understand how markets work. To know the criteria allowing him to decide whether to enter. And if so, at which price, as well as possible “escape” routes, or invalidation points.
There is something which novice participants struggle with. And it deals with the apparent chaotic randomness price shows, especially in short time-frames. Thus, traders guess they need a map, and the articles that follow are about one possible way to draw it.
The frequency bias
To succeed, participants must get rid of the frequency bias. The Frequency bias is the belief that trading financial instruments is about keeping a high success rate on entries.
The truth is, a given methodology could be profitable even with success rates as low as ten per cent (10%) with risk-reward ratios of over than 10 to 1. That shows we don’t need to predict the market. The real secret is to find situations where we could detect a high reward to risk ratio. With reward-to-risk of N, we just need to be successful once every N trades. That’s a fact.
Thus, reward-to-risk ratios used as a trade filter play the trick towards successful trading. Discarding low reward scenarios is a protection against losing streaks. When the odds turn against us, high reward ratios will help us get much sooner out of drawdown.
Elliott Wave as the trader’s map
The Elliot Wave Theory, coupled with Fibonacci retracements and extensions should be seen as a framework of reference. The Elliott Wave theory is often thought of as a kind of crystal ball with forecasting properties. Instead, we must put our focus on the achievement of entries and targets from a risk-reward ratio standpoint.
Next article will deal with the very basics of the theory.
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