Do you have to validate your trading ideas?
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  1. #1
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    Do you have to validate your trading ideas?

    Hi, traders!

    This is Value trader, I’m back from vacation and I want to start my activity on the forum with the article on pretty interesting thing that is rarely spoken about.

    How do traders find their trading ideas? Process of finding any trading idea or building algorithm consists of several steps – first they find idea, then they test it on historical data, calculate profit-factor and other parameters (if they aren’t satisfied with). In other words, they validate their hypothesis – they find confirmation for their ideas in the past. This type of thinking is very popular and wide spreaded, though it might not be very efficient – markets rarely provide good setups with linear correlation between event and outcome.

    The opposite type of thinking is to find events that don’t happen or happen very rarely and bet against them. Our brain might be confused with that – we are taught to find repetitive patterns and validate them with historical examination. But once you find a good pattern, you may notice that its' efficacy decreases over time. The more and more traders will notice a pattern and good opportunity will disappear or become less profitable as more traders try to benefit from a pattern. It is especially true when we talk about very popular currency pairs (or other trading instruments), for example – EURUSD, this pair attracts many traders and is often very overcrowded.

    It’s harder to think in terms of what will not happen rather than in terms of what will happen.

    Let me provide you couple of examples.

    Many traders like to trade-off possible reversals. If we see price that we consider as «high», we tend to seek for possible reversals whereas it is very tough to identify exact moment when price is starting to move in the counter-trend direction.
    If you would like to validate the idea of reversal, you would have to seek for possible reversal patterns that may look like this:

    reversal patterns.png

    But if you examine real price action using strategy tester in MT4 trading platform or any other software that allows you to simulate historical data, you would recognize that it’s pretty tough to spot a reversal – you would have approximately 4 losing trades in a series of 5 trades. Of course, if you keep your losses small and gains bigger, you can eventually trade with a profit. But if you start to think in terms of what will unlikely happen, your view has to become completely different. You may examine fake reversals and find most of reversal patterns can provide you good entries in the direction of the existing trend. You may have more modest profit/loss ratio in this case, but nevertheless you can achieve 2/1 or greater. And what is important – you will have probabilities on your side.

    I have put fake reversal patterns in the screenshot below with possible continuations. I employ them in my own trading, so can you.

    continuation patterns.png

    When it comes to reading real market context, we could have seen very obvious situation on GBPUSD so far. Strong trend could allow you to trade in the direction of existing trend at least 2 times:

    fake reversals example.png

    Those trades may not seem very attractive, moves are modest, but after all, you build your account out of winning trades, not of losing ones, don’t you? Two winning trades are better than two losing ones, that’s obvious.

    Good luck!

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    As pr my experince i use the validation in my trading strategy to confirm the trade idea.Like validating the wave pattern by counting all the waves or validating the chart pattern by all the properties.So validation give us more probability to get the success in trading.Validation is confirmation.

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    Quote Originally Posted by Value trader View Post
    Many traders like to trade-off possible reversals. If we see price that we consider as «high», we tend to seek for possible reversals whereas it is very tough to identify exact moment when price is starting to move in the counter-trend direction.
    If you would like to validate the idea of reversal, you would have to seek for possible reversal patterns that may look like this:
    Looking for the possible reversal but finally the trader reverse the trend. When trader look for reversal, the price going to continue the trend. Always use validate tool to determine the correct reversal area. Based on the picture, it says that there are some several possible reversal trend.

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    Quote Originally Posted by aris90 View Post
    Looking for the possible reversal but finally the trader reverse the trend. When trader look for reversal, the price going to continue the trend. Always use validate tool to determine the correct reversal area. Based on the picture, it says that there are some several possible reversal trend.
    it is not easy to do that because to know the trend reversal in the market that we would also have to have a lot of knowledge about how to perform the analysis in this trade better on news karean one important factor to look at the start weakening market conditions that we begin to analyze the news in our nation currency traded so that there can be the basis and foundation to see a trend reversal

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    Mr. Value trader, first of all i would like to appreciate and thank the effort you are putting in educating us regarding the trading. This article has helped me a lot now to identify and stay alarmed regarding the fake breakout patterns formed. Validating the trading ideas and trading process both are very much important for a traders success.

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    Quote Originally Posted by aris90 View Post
    Looking for the possible reversal but finally the trader reverse the trend. When trader look for reversal, the price going to continue the trend. Always use validate tool to determine the correct reversal area. Based on the picture, it says that there are some several possible reversal trend.
    When we are seeing market movement then there are 2 possible choice. Market will continue the trend or it will start to reverse. It means we must validate it first in order to follow the movement. If we already sure about market direction then we still need to find the best timing to open order. The last step is about when we must close the position and getting maximum profit.

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    Quote Originally Posted by thenight View Post
    When we are seeing market movement then there are 2 possible choice. Market will continue the trend or it will start to reverse. It means we must validate it first in order to follow the movement. If we already sure about market direction then we still need to find the best timing to open order. The last step is about when we must close the position and getting maximum profit.
    You are seeing market on two different situations,i could see it affects you finally,the decision becomes bias,the trading is not clear,you trade buy or sell without knowing the sign and reason of that,you can finally lose the capital because of that,losing it many times,rinse your capital in vital situation.

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    It is quite interesting if the trader makes confirmation on the side of the market the trader want to take, this will filter the trade of the trader more often, than just to be doing trading with the anxiety of just doing it. This is very bad for traders to do. I know that if you validate the system you use for trading, it will help you to know the direction with better probability.

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    know about trend reversal in market its easy to do because to identify this we need so much knowledge and need good analysis in trade. its helps to identify the fake breakout pattern formed. in this ideas have best role to be successful trader.

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  10. #10
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    Quote Originally Posted by COMANG View Post
    it is not easy to do that because to know the trend reversal in the market that we would also have to have a lot of knowledge about how to perform the analysis in this trade better on news karean one important factor to look at the start weakening market conditions that we begin to analyze the news in our nation currency traded so that there can be the basis and foundation to see a trend reversal
    A lot knowledge is needed by trader to determine the reversal area. Trader need more experience to understand well the market. Trader get experience as they he start making some prediction in reversal area. Sometimes trader get loss, and he wrong making prediction.But time go as trader making loss and wrong position trader get experience more and more.

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