Thinking In Probabilities

Duke Heberlein is
on vacation. Michael Brooks wrote this article.

When there is one particularly weak stock in a sector, there are often others
within the sector that are exhibiting similar weakness. The TradersWire research
team will often try to uncover several possibilities for you to choose from.
Let’s take a look at an alert coming across this morning’s TradersWire:



10:07:37

Applet Analysis Alert

Equifax (EFX)
retouches the 20- and 50-day moving averages. EFX
looks like it may be
showing signs of rolling over after being up for the last few days. Yesterday
EFX
moved into some chart resistance and closed poorly. A move back down
below the 20- and 50-MA could signal a resumption of the recent downtrend. Also
watch Paychex (PAYX)
which is trading near its lows.


Would you choose PAYX or EFX?


In this case, I don’t know that there is a right answer. This really depends
on your trading style. If you like to trade breakdowns you may have gone with
PAYX
. If your style is more suited to pullbacks into resistance, then you may
have gone with EFX. The key is that you had an edge to the downside and
you went with the stock that followed your trading style and plan.

Let’s examine EFX a little closer. What made probability favor the downside?
EFX was in a recent downtrend and had pulled back into chart and moving average
resistance on decreasing volume. Yesterday EFX saw volume start to increase but
the stock barely moved higher and closed near the lows of the day. 

Finally, a
move below yesterday’s low would put in place the formation of a higher low. All
these factors together, along with a sector that is weak, help give us an
edge for a downward bias. That’s all we can ask for. We don’t know if this
particular trade will go with the bias or reverse and stop us out for a small
loss. What we do know is that if we continue to stack probability on our side,
over time, the numbers will work out in our favor. That’s how a professional
trader consistently logs profits week after week, while the novice continues to
worry about being right on the very next trade.

Learn to think in probabilities and much of your frustration with trading
will go away. When you really start thinking this way, the odds will favor you
succeeding at this very rewarding but sometimes difficult business we call
trading.

Have a great trading day.

Mike

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