I’ve expanded a bit to include the possibility of multiple waves (as alluded to in previous posts) occurring, rather than only looking at 3 leg waves and guessing about the probability of specific legs to follow.
I did some work on what I call single, three, and five wave breaks/stats
Our original thought going into these stats should be “trends rule” because that’s what we’ve seen so far. Therefore, it might be alarming that there is a slight edge to a one ‘leg’ wave reversing rather than continuing. However, if we think about what this means a little more, it makes some more sense. This is because in any “trending leg”, that is directional move, retracement, directional move in the same direction, the second leg is broken in the reversed direction to complete the trending state and therefore counting towards the “reversal” probability shown. This also happens in expanding 3 leg moves.
From this specific model, 3 wave and 5 wave continuation stats are very similar, so I decided to work with just the 3 wave stats to make it more simple.
Of course, i can’t know a wave is completed until it’s done, but we can use the rule of “almost there” and diminishing probability in a lot of cases to learn more about how price moves.
If we can expect a certain kind of leg to appear, it becomes cakewalk really. The expanding condition is much harder to capitalize on than the spring due to the natural movement of markets and R:R involved.
If we follow breakout theory there’s actually some good evidence for it:
97%, but there’s the 3%, or 4 cases that I’m scared of. In reality, to account for spread, i’m scared of anything that’s lower than 7 pips. The dream is really 10 pips I think. Even so, there are only 13 cases to look at. In those cases, the P/L on an entry – bar close are as follows: