Thus, I state that successful and consistent trading results can be achieved by investigating natural market features, and by using purely statistical estimation methods of market movement probability in any direction at a given moment. This probability estimation is based on the standard set of templates projected on the current currency chart. If a template coincides with the current market situation, I make the decision to enter the market. In every case, each trading position on the market is chosen in the most probable direction of the movement, which provides a positive statistical balance in favor of profitable trades. In this chapter, we discuss which features and regularities can be considered as natural market activities.

it is known that the technical analysis philosophy is based on three main statements:

•  The market considers everything.

•  The market moves in accordance with trends.

•  History repeats itself.

Although I accept and share these statements, I offer my own philosophical conception on the basis of which I developed my trading method based on common sense. In general, it does not contradict technical analysis principles, rather it supplements them.

The following three main postulates are the philosophical basis of the new method and supplement the philosophical principles of technical analysis:

•  There are only two possible directions of a market movement.

•  The market moves permanently.

•  The market forms its trading range daily.

THERE ARE ONLY TWO POSSIBLE DIRECTIONS

OF A MARKET MOVEMENT

Most traders do not fully realize this obvious statement. Somehow, it even contradicts the opinion widely held by traders that the side trend of market movement is a kind of third direction. However, on close examination, this side trend only occurs when there are alternating oscillations: up or down. The paradox is that the majority of traders cannot use that simple phenomenon to benefit from it. However, if you think about it, an accept­able trade strategy can be developed on the basis of this statement alone.

Some inferences from the first postulate turn out to be very important in benefiting from market rate fluctuations. Let us use common sense and elementary logic to formulate and then analyze some of these inferences according to their primary practical importance.

I consider the fact that there are only two possible directions of market movement very important because this limits the market options of reducing a trader's money. At any given moment, the trader has a minimum 50 percent statistical probability opening a new position in the right direction.

Here, I have to make a brief detour and somehow explain my position about a skeptic's opposite point of view about the same fact. Why should we consider the 50 percent probability of market movement in either direction as a negative factor, whereas the same probability about the trader is taken as positive? The reason for this seemingly contradiction is very simple. We consider the market behavior as primary and the trader reaction as secondary because, in making decisions and taking positions, the trader only responds to market changes.

So denying the assumption that trader activity causes market rate fluctuations, I suggest considering the market as spontaneously changing under the influence of factors unknown and unrecognized by us. Then, it can be concluded that a trader could survive in this environment only if he adjusts to these conditions. He should not try to dictate his will to the market, but only explore the ability to benefit from some of the market's features. One of these features is the market's ability to move in either of just two possible directions.

If this statement is taken as a starting point, one thing is clear. For a speculative trade on the FOREX or on any other market, it is necessary to know that the statistical probability of all trade results should exceed 50 percent to the trader's benefit in order for the final result to be positive. (This assumes the condition that the average profit per any successful trade exceeds the average loss per any unsuccessful trade). In fact, it would be reasonable to conclude that, to get generally positive statistical results, the initial probability of achieving success from any new position opened by the trader should exceed 50 percent. Positive statistical results need an effective evaluation method for this objective probability calcula­tion at any given moment. For the development of such a probability evaluation system, the following statements (which are the basis of this method) are of primary importance.

This statement means that if a market is not moving in one direction, then it is moving in the opposite direction. In other words, a market's motion­less state is practically impossible. Any position opened in any direction cannot keep the trader uninformed about the result for a long time; in a few minutes or hours it will generate either an essential profit or an essential loss.

An essential profit now and later means a profit equal to or exceeding 25 percent of each trade's trading capital (or initial margin). For the major currency rates at an initial margin of 2 percent, it equals $500 for any min­imal standard contract of $100,000.

Because of specifics of money market trends, substantial fluctuation amplitude of each trend is a rule, whereas a narrow and more or less continuous side trend is rather rare. Any taken position may generate profit or loss in a few days, which will be several times more than the initial margin size. This particular feature of the money market allows everybody to conduct a very interesting experiment/investigation. First, you should picture two parallel lines at a distance of 50 to 70 or even 100 pips from each other, drawn on a randomly chosen area of a chart showing the prehistory of any of the major currency rates (distinguished by their almost ideal liquidity and highest activity). Then, imagine that every time the market crosses this line in the upward direction, we open a long position. Then, imagine that every time the market crosses this line in its downward di­rection, we open our short position. In other words, the open short position is always below the lower line, and the open long position is always above the upper line. See what happens next. This simple experiment helps to explain that, regardless of the initially opened position, this ac­tion will immediately bring a substantial, progressing profit. In another scenario, closed with a loss and being reversed in the opposite direction, the new position would sooner or later generate the same profit; or, as a minimum, would cover the initial losses by the subsequent profit. In this case, the multiple market movements up and down crossing the drawn horizontal lines on the charts will cover the initial loss or any possible series of consecutive losses. This is true even if the zone we use is optional and we choose it in the very middle of any real horizontal trend seen in the past—even the most prolonged in the trading history of any major currency pair. See Figure 7.1.

There is a logical conclusion based on this simple experiment/investigation: Any random position opened at any randomly chosen price will allow the trader either to get a substantial profit immediately or to be in a break-even situation after a relatively short series of simple, automatically performed transactions.

FIGURE 7.1 Two randomly chosen 70-pip ranges on EUR/USD chart. As you can see here, any long position taken at the upper lines of each range or short position open at the lower line of both ranges sooner or later becomes profitable. This is true even if the choice to open a position was made based on a coin toss. After several possible losses and reversals, at least a break even is practically guaranteed. Try this for your own home research on any charts of major currency pairs.

In the foregoing discussion, I somehow simplified the situation by not considering the probability of draining the trading account because of so many turnovers. I have no intention of suggesting this probability as an option to the readers, but only to use it as a theoretical illustration of the statement of a market's permanent movement. Opportunities to use the statement in practice will be described in the following chapters of the book.

Now it is time to discuss the third and final basic philosophical postulate of my method.

THE MARKET FORMS ITS TRADING RANGE DAILY The third postulate is as logical and natural for the market as both previous postulates, and it is very important to a trader. It states that, during one trading day (i.e., 24 hours), the market should start and finish a certain trading range. This range can be simply calculated based on an analysis of each currency rate's behavior on the preceding day even for a relatively short period. In other words, for any currency rate, there is the so-called daily operational task to fluctuate with amplitude of a certain value. This minimum to average fluctuation amplitude is not the same for different currency pairs. Also, from time to time, it deviates for the same currency pair, depending upon market activity due to cyclic oscillations. Nevertheless, the intraday fluctuations mean amplitude is more or less stable for each cycle. The duration of each cycle is measured in months, optimally providing the base for the approximate calculations of the mini­mum to average fluctuation amplitude. This calculation allows a trader to conduct an approximate advance forecast for the current day.

The practical use of the three basic postulates of the method will be discussed in subsequent parts and chapters of this book.

After creation of a philosophical basis of the method, formulating the basics strategy and tactics of a speculative trade was an easy job for me. It involves six steps:

•  The fundamental nature of the exchange rates' fluctuations is not de
nied by the method, but in practice it is not taken into consideration
because it does not directly affect the trader's one and only goal,
which is to gain speculative profit on the basis of these fluctuations.

•  The basis of the method is the trader's reaction to trading signals gen
erated by the market itself. The application of substitute and artificial
derivatives such as indicators, oscillators, and other man-made instru
ments is essentially limited in this method. (In reality, for the market
analysis, I use only two or three indicators, which have no indepen
dent significance and serve only to confirm basic signals in accor
dance with the principles of my trade methods.)

•  The signal's identification on a buy and sell is based on a set of market
behavioral models. The trade takes place when one of the trading
templates corresponds with a current market situation.

•  The templates represent a set of standard variants of a trader's ac­
tions executed in a certain sequence.

•  The basis of all templates used in the method is the estimation of a mar­
ket movement probability in one or the other direction. The estimation
of probability is made with the use of some rules of technical analysis
combined with money management elements in each of the templates.

•  Sometimes there is a possibility of using several different templates in
the same specific market situation. In this case, a final choice depends
on the trader's will, his individual desire to undertake an increased
risk in exchange for an opportunity to gain an essential profit.

It is clear that the trader's basic task is to be on the right side of the market at the right moment. Basically, it is supposed to be his only concern.

My trade method is based on probability evaluation of the market future behavior, which, as stated earlier, represents a set of templates that are formulated in advance and then tested. The trade does not occur until one of the templates corresponds with a current market situation. If and when a template corresponds with the real market situation, the decision to open or to liquidate a position will be taken by trader almost automatically. In addition to some elements taken from technical analysis, I also apply some issues concerning money management. They are an important part of a trade strategy and serve as the additional insurance in the event that the signal subsequently appears false and the market changes its direction.

Therefore, it is possible to tell that different templates represent combinations of trade signals received on the basis of the technical analysis, estimation of probability of common statistical laws, and money management.

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