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In the MTR section Al discusses the probability of getting a MTR swing as being 40%. Also, in his breakout rule he states that 80% of breakouts will fail. If a MTR is occurring during a trading range, and the MTR is the breakout of this trading range, how are the conflicting probabilities explained?
Hi Jacob,
I think MTR takes place in a very specific context that hints strongly at trend reversal (TL break, going above/below prior major highs/lows, prior extreme retests, multiple failed attempts at resuming trend) and so the 40% chance to reverse the prior trend is the dominant consideration. But when this price action grows into a protracted TR, then the 80% attempt to BO starts to take over. After all, one side kept trying to reverse the trend so many times already and kept failing, their MTR just isn't working out.
So even though we may consider MTR inside a TR, if the TR is extremely protracted, I think the 80% chance failure rate has to come first and if the BO does succeed then we switch to considering the 40% of a new trend happening as for MTRs. And if the BO is extremely strong with good FT then maybe even bump it up to 50% to start a new trend.
Hope this helps,
CH
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Thanks Mr. Carpet,
I think that makes sense. Then again, it's hard to say when the context is hinting strongly at MTR vs trading range (at least for me) because trading ranges look like constant breakouts at every turn. 80% we'll stay in the current trend, 80% we'll stay in the current TR. So what you're saying is, given the 80% rule, if there is enough confluence to suspect a turning of the tide, then 40% chance of MTR?
Mike,
Excellent point - every bar is a breakout of some kind. Thanks!
For example, up to (A) it makes sense to think of the context as predominantly MTR, but when the TR becomes extended (yellow box further on) then it makes sense to treat all BO attempts as 80% chance to fail. Then when a BO finally happens with FT (B) can upgrade it to 50% chance to successfully get out of TR. I personally don't think of it in MTR terms by that point anyways, just BO attempt of an extended TR.
Thanks Mr. Carpet, great explanation!