Traders like to talk about “probability” when they assess trades. But too often those probabilities are derived from formulas, algorithms, or gut reactions that are too general to capture the true complexities of trading. Or, they are based on short-term activity that hides a deeper, more substantial market movement.
For example, momentum may rule a single day, but careful observation reveals the odds are actually building that continuation is unlikely during the following session. Traders caught up in the moment may misconstrue motion in a single direction as setting a dominant tone, when in reality there is no underlying support for the move. They get lulled into thinking one thing is happening—a “probable” move in one direction—when the structure of the market activity reveals the opposite to be true. That structure can take the form of a weak high or low, when the Market Profile has no single prints on an extreme, which is a clue that the auction is not complete.
It is imperative that “momentum” be considered along with other factors, like poor highs and lows, prominent Points of Control (POCs), and daily volume analysis in order to properly understand the bigger picture. Popular algorithms often fail to properly weight various indicators, resulting in erroneous cues that lead traders to favor emotional reactions to temporary movements; instead of the deeper insight that comes from holistic market understanding.