# Forex Trading – use probability and statistics to improve your Profits – Here's How

**Forex Trading – Technical Analysis using Price Action**

Prices on any Financial or Forex Market chart move up, down or sideways and dependant on the timeframe they could almost be doing all three at once!

Sometimes forex prices move off in one direction and tempt you into a trade only then to turn against you and take you out of the trade for a loss; price then goes off in your direction and turns out to be a great trade….. if only you’d have still been in the market!

So in this article I set out to see if there was a way to avoid what is, for most traders, one of the most frustrating things the market does. **Sucker you into a trade, take your money, then do exactly what you expected and predicted**

The trouble with the markets is that on an individual trade they are largely unpredictable. But, over 100 trades you start to see “clustering” of patterns, moves, and events. These become much more predictable than any single event and knowledge of these can, should, and usually does, greatly assist in being right with your trades “in the long term”. And that is really all that matters because if you’re right in the long term you will prosper. ( given that you get a few others things right…)

So how can we get this longer term Price Information and apply it to our individual trades so that we’re more right than wrong in the long term?

**The answer is statistics**

Now I know many people will at this point take the view that Statistics are just too complex and unrelated to the real world, and yes, statistics can in some cases tell you what you want to know rather than what you should know. But we’re only talking very basic math here and it shouldn’t get too complicated.

So let’s start out with some truths that we know about the market:-

Price moves Up and Down.

Price only moves so far before moving to some degree in the opposite direction.

The price action can be summerised as a series of “zig zags” – sometimes moving in an overall direction (a trend) and sometimes not (sideways or range-bound)

We could measure these “zig zags” and see how far the market “usually” moves in one direction before moving back the other way.

**How would this knowledge help us?**

Well surely if we knew that price usually moves 40 pips then moves in the opposite direction we would at least have an indication of where to put a stop loss. Maybe we could use it to help with a profit target. Maybe it would help with risk management.

It will actually help with all of these as we’ll see – however this is a subject that is much more easily explained in a video and I have produced exactly this for you to view here…

http://fivetictrading.com/free-fx-information/using-maths-in-your-trading

**The essence of the techniques is this:-**

**On any Forex (or Financial Market) chart** draw lines from the Pivot High to the next Pivot Low, then from that Pivot Low to the Next Pivot High. This can be drawn manually or some charting packages include an indicator called “zig zag” that you could add. This should be done on the timeframe up from the one you intend to trade. So if you trade a 15 minute chart then do this on an hourly chart and so on. Also ensure that the lines are correct – basically you need to make a judgement; if you were in a trade during the period of the line under consideration ask yourself, ” would you stay in the trade all the way to the end of where you intend the line to ?” If there is a large enough move in the wrong direction that would in reality cause you to exit the trade then the line should be drawn to the turnaround point.

Now create a spreadsheet that has a column heading of “line length in Pips”

Back to the chart and measure each line that you have drawn, these by the way, need only be done for the times of day you actually trade the markets.

Enter each line length into the spreadsheet.

Repeat for 100 lines

You now need to do some programming as follows:-

Take a quick glance down the list of 100 line lengths – what is the smallest and largest?

Let’s say the smallest is 18 pips and the largest is 85pips. You need to split this range of numbers into approx 10 equal divisions. So in the case here start with a column of <20, then 21 to 30, then 31 to 40 and so on.

Add column headings so you now have the line length column and 10 others with headings of “31 – 40” etc.

Now add the following formula into the columns adjacent to the top line length

**=IF($A6<=30,1,0)*IF($A6 >=21,1,0)**

In this formula the top row of the 100 line lengths is in A6. This formula is under the column heading “21 to 30 pips” The formula will look at the line length is A6 and if it’s less than or equal to 30 it will put a 1 in the spreadsheet BUT ALSO, if the line length in A6 is greater than or equal to 21 it will put a 1 in the box.

Thus we have a formula that will put a 1 in a box if the line length is between 21 and 30, otherwise it will out a 0 in the box.

Now copy and paste this formula to the other 9 or so columns. You’ll now need to go to each in turn and change the 21 and 30 figures to that relating to the particular column. This should give you a row that has all “0’s” apart from one column which has a “1” corresponding to the line length for that row.

Now copy and paste the entire row of formulae to the rest of the worksheet.

You thus have 100 rows, with say around 10 columns of analysis where every row is all “0’s” apart from one which corresponds to the line length for that row.

Finally (almost) at the bottom of every column of formulae put a sum formula

**=Sum( E6:E107) **

For adding all the “1’s” in the column E where the first row of calculations is 6 and the last is 107

You’ll now have a line that looks something like:-

2 12 22 34 20 16 12 6 3

This tells you that the most frequently occurring line length is whatever the 34 relates to. Let’s say that column heading is 41 to 50 pips.

**NOTE – this has nothing to do with “averages” – we need to know the most commonly occurring “move” this market on this timeframe makes.**

As the column is 41 to 50 pips we’ll take a figure of 45 as our **“MOST COMMMONLY OCCURRING PRICE MOVE”**

**How To Utilise This New INFORMATION**

To my knowledge this information is unique to myself, Matt Sharp and is fully explained in the multi-media Forex Trading courses available.

Basically you use this measurement as a “measuring stick” before entering a trade. It provides a guide as to whether the risk on this trade is acceptable, whether the target price aligns with an existing level of support or resistance , and if used correctly will vastly reduce the problem identified at the start of this article of entering trades at the wrong time and place.

This has been a very technical article and you are welcome to contact me for further explanation if required.

Source by Matt Sharp