How To Use Probability & Evidence For Better Entries?
Some Tips And Tricks For Getting Better Entries In Your Trades.
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We have a question from Shauna who asks about today’s upside bias for the AUDUSD, NZDUSD and the EURUSD and asks whether we are still waiting for pullbacks in these pairs or whether we can trade them as the pairs push through key resistance areas.
I think the question allows us to share some tips on using probabilities and evidence when looking for entries in line with our biases.
When looking at these three pairs, all of them has one common denominator, which is of course the USD. Now, our bias for the USD has been titled lower since the start of June if you recall correctly, based on a few different variables, all of which are still in play.
Now, the one thing we always need to consider for finding optimal entries is thinking in terms of probabilities. Even though our bias remains to the downside for the Dollar, the recent move from last week has barely had any meaningful pullbacks.
There is no rule that the market has to wait for a pullback before continuing with a strong trend, that’s why trading in line with the trend is so important, but we also know from probabilities, that the market usually doesn’t move in a straight line up and down, it oscillates.
And what we try to do as traders is trade in line with those biases but doing so from areas of value, basically being able to buy in lower and sell higher, basically looking for bargains. Now there is definitely nothing wrong with trading as resistance areas fold in these markets, but seeing how far these has gone already means the further they push the higher the likelihood or probability becomes for them to flush and pullback.
So, that’s the first step, thinking in terms of probabilities. Then there is also evidence. So, looking at the evidence for something like the AUDUSD and NZDUSD and EURUSD in terms of the options market, there is a couple of caveats to mention.
The AUDUSD, even though the bias remains to the upside, has a very mixed bag of puts versus calls for the next few trading days, meaning there is both buying and selling interest at these key levels lower, especially close to 0.7050, which means buyers wants to keep us above that level and sellers wants to keep us below that level, which means more caution is needed, thus waiting for a deeper pullback based on the evidence makes more sense.
Looking at something like the NZDUSD in terms of options, things looks slightly better with the biggest bulk of the week’s biggest option level sitting in calls, meaning there is lots of market interest for keeping it above 0.6675, but looking above that is the highs from last week, so you can wait for a pullback to 0.6675 and enter based on this, but that doesn’t give you a lot of room to the upside based on the evidence on the chart.
The Euro, also has very good options interest with the balance firmly skewed in the favour of the buyers, especially at 1.1650, which means anything above 1.1650 and buyers should be happy, which also gives us a decent area for pullbacks where the market will have a vested interested to defend prices if that makes sense.
Apart from that, just looking at this chart on the Daily, you obviously want to be a buyer, but looking at this chart going almost vertical, the attractiveness for longs way up here looks rather diminished from a risk to reward point of view.
Then apart from just the chart evidence and the options evidence in this example, we also highlighted a couple of important points in our top trading opportunities report.
In the report we highlighted some research from Nordea Investment bank which showed that markets have been wrong-footed four times out of the last five times since 2012 when USD short positioning was as stretched as it is now in terms of positioning versus open interest.
Now this of course doesn’t mean the Dollar mush retrace, it just means the evidence is growing in terms of probabilities to at least expect some pullbacks at some stage.
So you see, we’re looking at many different things here in tandem from options interest to the charts to additional research all pointing to more caution than chasing higher from here.
Of course, that means that sometimes you’ll miss further moves higher, but at these levels I would rather be patient and get a better entry than jumping in at these levels without seeing any decent pullbacks.
So, we’re not less bullish on these from a Dollar point of view, we’re just more patient given the probabilities and the evidence.
So, hope that helps Shauna, any other questions just let us know.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question from Shauna who asks about today’s upside bias for the AUDUSD, NZDUSD and the EURUSD and asks whether we are still waiting for pullbacks in these pairs or whether we can trade them as the pairs push through key resistance areas.
I think the question allows us to share some tips on using probabilities and evidence when looking for entries in line with our biases.
When looking at these three pairs, all of them has one common denominator, which is of course the USD. Now, our bias for the USD has been titled lower since the start of June if you recall correctly, based on a few different variables, all of which are still in play.
Now, the one thing we always need to consider for finding optimal entries is thinking in terms of probabilities. Even though our bias remains to the downside for the Dollar, the recent move from last week has barely had any meaningful pullbacks.
There is no rule that the market has to wait for a pullback before continuing with a strong trend, that’s why trading in line with the trend is so important, but we also know from probabilities, that the market usually doesn’t move in a straight line up and down, it oscillates.
And what we try to do as traders is trade in line with those biases but doing so from areas of value, basically being able to buy in lower and sell higher, basically looking for bargains. Now there is definitely nothing wrong with trading as resistance areas fold in these markets, but seeing how far these has gone already means the further they push the higher the likelihood or probability becomes for them to flush and pullback.
So, that’s the first step, thinking in terms of probabilities. Then there is also evidence. So, looking at the evidence for something like the AUDUSD and NZDUSD and EURUSD in terms of the options market, there is a couple of caveats to mention.
The AUDUSD, even though the bias remains to the upside, has a very mixed bag of puts versus calls for the next few trading days, meaning there is both buying and selling interest at these key levels lower, especially close to 0.7050, which means buyers wants to keep us above that level and sellers wants to keep us below that level, which means more caution is needed, thus waiting for a deeper pullback based on the evidence makes more sense.
Looking at something like the NZDUSD in terms of options, things looks slightly better with the biggest bulk of the week’s biggest option level sitting in calls, meaning there is lots of market interest for keeping it above 0.6675, but looking above that is the highs from last week, so you can wait for a pullback to 0.6675 and enter based on this, but that doesn’t give you a lot of room to the upside based on the evidence on the chart.
The Euro, also has very good options interest with the balance firmly skewed in the favour of the buyers, especially at 1.1650, which means anything above 1.1650 and buyers should be happy, which also gives us a decent area for pullbacks where the market will have a vested interested to defend prices if that makes sense.
Apart from that, just looking at this chart on the Daily, you obviously want to be a buyer, but looking at this chart going almost vertical, the attractiveness for longs way up here looks rather diminished from a risk to reward point of view.
Then apart from just the chart evidence and the options evidence in this example, we also highlighted a couple of important points in our top trading opportunities report.
In the report we highlighted some research from Nordea Investment bank which showed that markets have been wrong-footed four times out of the last five times since 2012 when USD short positioning was as stretched as it is now in terms of positioning versus open interest.
Now this of course doesn’t mean the Dollar mush retrace, it just means the evidence is growing in terms of probabilities to at least expect some pullbacks at some stage.
So you see, we’re looking at many different things here in tandem from options interest to the charts to additional research all pointing to more caution than chasing higher from here.
Of course, that means that sometimes you’ll miss further moves higher, but at these levels I would rather be patient and get a better entry than jumping in at these levels without seeing any decent pullbacks.
So, we’re not less bullish on these from a Dollar point of view, we’re just more patient given the probabilities and the evidence.
So, hope that helps Shauna, any other questions just let us know.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
