Defining High Probability

i. Probability

a. The relative possibility than an event will occur, as expressed by the ratio of the number of actual occurrences to the total number
of possible occurrences.

b. The relative frequency with which an event occurs or is likely to occur

ii. High Probability Trade

a. A trade which yields a profit more often than a loss.

b. A trade which works more than 50% of the time.

In other words, a high probability trade is a type of trade which will yield a positive net result over an extended period of time and that
result is not random. Key words being "not random".

I frequently make reference in my material to locating high probability trades. I think I do a pretty good job of explaining why certain
trades are more likely to yield a profit than others but I felt like an additional document was necessary which really broke the idea
down to its core level.

The constant debate in the world of trading for many years was whether or not some people are just lucky and some are unlucky.
There are mathematicians who suggested that in a world of random events, some traders will win and some will lose and some will
exceed what would be considered the normal statistical odds on both sides (i.e. a few guys will make 50 million and a few will never
make one winning trade). As time has progressed and more knowledge has been gained by the general public, I think far fewer
mathematicians would now hold this stance. Anyone who has ever worked for a trading firm already knows better.

Imagine if you had a friend who worked for a huge trading firm. Imagine this friend called you and informed you every single time he
was about to buy or sell 10,000 contracts in the 10-year notes. He told you thirty seconds prior to executing. 10,000 contracts is
going to move the market. There is hardly ever a time when it would not. He tells you he's buying and at what prices he is willing to
buy. You buy first. He buys. The market goes up on his volume. You profit. You are front-running his order. There is absolutely
nothing random about those results.

I do not have those kinds of connections nor, I'm sure, do any of my customers. However, it is possible, at times, to identify high
probability trades if you understand the dynamics and mechanics of the markets and you understand how size influences movement.
What I am doing is making educated guesses based on my experience. The educated guess is not based on random events and it is
not based on a strategy which has no basis in reality and no better shot at producing profits than a 50/50 coin flip. It is based on
understanding how markets tend to behave and how orders are placed, cancelled and executed.

Example 1

I'm going to use several examples and illustrations to make my point about high probability trades. The images you will see below
are included in the webinar starter folder titled "Reading the cumulative volume profile". If you will read those documents and watch
that video, this will make more sense.
In the above illustration, you can clearly see that the ES easily sold through the prices of 15.25, 15.00 and 14.75 on very light
volume. The market then began ranging between 13.00 and 14.50 on much heavier volume. If you see a market break overnight
lows that easily on light volume and fail to get back to those prices, why would you be a buyer? A long trade executed at a price of
14.00 or higher at that point in time has a very low probability of becoming profitable within the next few minutes. The only logical
play here is to either be in a short trade from the top end of the new range (14.00 to 14.50), maybe take a long trade at 13.00 or
13.25 keeping a stop at a break to new lows (not recommended), or be flat and wait and see what happens. At that particular
juncture in time, taking a buy side trade at 13.50 or higher with the expectations that the market will rally back to 17.00 falls under the
category of "extreme wishful thinking". Statistically speaking, it is more likely the market will either range between 13.00 and 14.50
for an extended period of time or sink to new lows. A trading strategy should be adjusted accordingly.

Example 2
In the above illustration, you can clearly see that buyers not only carried the market to new highs but they also supported those new
highs and kept bidding at 127'230 and 127'235 while not allowing the market to fall back to 127'225 or lower. This is the definition of
buy side support. Yes, there was also selling at those prices but those sellers were not willing to try and drive it down to even
127'225. If you see this, why would you be a seller? There is nothing about the situation which indicates a short trade being a good
idea. Statistically speaking, it is far more likely the market will move higher over the course of the next few minutes.

Example 3

In the above illustration, look at the area between 18.00 and 20.00 which I define as "No man's land". Do you think there is any
available information at that point in time which can give you insight into the most likely direction over the next few minutes? Is there
anything at all which screams "Buy 19.00" or "Sell 19.00"? How can anyone consider a trade initiated at that price during that
moment in time to be a high probability trade? The market is in the middle of a valley which is in between two peaks and there is no
way (in my mind) to get a feel on what the market makers, HFT programs, arbitrage guys and two million other stock traders are
going to do there.

This is not rocket science.

iii. Common questions and beliefs shared by nearly all retail traders

I recently received an email from a customer who, I think, put into words what nearly everyone feels when both trading off technicals
and when contemplating the leap to studying order flow. What you will read below is his questions and my answers to his questions. I
think this exchange proved very helpful to him and I think there are many other traders who will find it helpful as well.

The email started with him explaining that he and a few other traders he knows had basically reached the conclusion that trading
was a numbers game and everything else was irrelevant. It was all about risk to reward, cutting losses and riding winners. However,
he now realized that maybe it wasn't just about that and started to see that perhaps there were other ways to substantially improve
the accuracy of his reads. He had a read a book (no title given) which he said "challenged" his trading beliefs and his ideas about
how the markets operate. He then began exploring the concepts behind order flow and reading the DOM in hopes that this
knowledge would help him increase his success rate and improve profits.

My initial response

The common belief is that trading is a numbers game. The truth is that it is and it isn't. This is why most people fail. They think, as
most educational courses teach, all they have to do is be right about 25% of the time and if their risk to reward is right, they will still
make money. Yet they usually don't make money. Or they make a very small amount and sit through heavy drawdowns to achieve a
paltry return percentage wise.

Everything else besides the numbers is most definitely not irrelevant. That line of thinking is derived from the natural progression
most retail traders experience which is precisely what he had experienced up to this point and what I experienced prior to joining the
trading firm in Chicago. It is not derived from reality. Mathematics has to be taken into consideration but so do the fundamentals of
the game. All movement is not random so if that's the case, the non-random factors have to be factored into the equation prior to a
person making a decision.

The first few paragraphs on the "Introduction" page of my site (under the No BS menu tab) should be enough to make anyone stop
and contemplate what they are doing if they're trading solely off TA and viewing it as only a numbers game. Virtu had one losing day
out of 1200+ days. They obviously didn't achieve that using chart patterns.

Below are several of his comments and my response to each.

Comment 1

To me, tight stops have always been around 5 pips (he trades the Euro and spot markets) although this would vary depending on
market conditions and sometimes would need to be increased but I would never normally exceed 7 pips. The formula works if you
allow those trades that run to run. It's all about risk reward ratios. Of course you never know what trades may or may not run so it
basically then becomes a numbers game. I'm normally targeting 20 pips a day so risking about 2% to gain about 10% ish. Obviously
that's the aim. In reality, of course, it's doesn't always happen.

Response 1

The most important sentence is "In reality, of course, it doesn't always happen". You have to ask yourself why that is and if you really
think about it, you will realize it's because you have no true viable edge. You are not making a high probability trade. You are making
what may actually be a low probability trade but hoping that when it does work, you catch a huge winner. But why will it be a huge
winner? What kind of information is available to you which gives you any reason to think that the market will go 20 or 30 or 40 ticks in
your favor? How do you think you can know that? A trend only becomes a trend when a very large amount of orders begin to
overwhelm one side. This then creates a domino effect. More people on the winning side add to or hold their positions and more
people on the wrong side exit for losers which in turn keeps the trend moving in one direction and this continues until finally everyone
has had enough and the winners decide to start working out for a profit and things stabilize.

At times, you can make a fundamental call on long term direction. If you're a corn farmer and you have access to the cash markets
and you can see real supply and demand, you can probably figure out where corn is going to be in two or three weeks within reason.
What you cannot do is predict the next 30 tick run on an intraday basis. They do occasionally happen and you do occasionally catch
them but when you do, you are lucky. End of story. The problem is that traders mistake this luck for skill and it encourages them to
continue trading strategies which actually give them no better shot of winning than throwing a dart at a list of stocks. Again, you have
no viable edge. Your risk to reward is maybe keeping your account alive and perhaps you are making some money here and there
overall but ultimately, you're not trading a strategy which gives you anything remotely close to high probability trades.

Also, you're targeting 20 pips a day. What makes you think there will be 20 pips to be had every day? If you've been doing this for six
years, you must be aware that some days are volatile and others are not. You cannot approach every day and every trade the same
way. That type of thinking falls under the "one size fits all" category of trade management which I discuss in one of the webinar
starter documents.

Comment 2

What's important for me moving forwards is that I fully understand the game I'm in so my decisions are based on what's actually
happening rather than the numbers game into which my trading has evolved. I'm not saying it doesn't work but it's a very tough way
to trade because you cannot explain via chart patterns why one trade fails and one doesn't so the method I use normally has a very
poor win rate, as low as 30%, which is countered by risk reward ratio.

Response 2

Exactly. You cannot explain via chart patterns why one trade fails and one doesn't. This is because you are staring at a chart pattern.
The reason one trade fails is because you stepped in front of orders which ran over you and ran over everyone else on your side.
The reason one trade works is because you happened to be in an area where a bunch of other orders came in at or near your price
and joined the battle to go the other way. In addition, the opposing side decided to let up and run away at that point. So if you're
going to place an order, why not wait till it's very clear that your side is already fighting and the other side might be fleeing. It's not a
guarantee that your side will win but at least you can see you have power behind you. This is one of the benefits of watching the
order flow.

Comment 3

So how you do it doesn't matter. In the end, it's the "equation" that's important and that must contain a balance of risk reward, win
rate and probability. The more of those three together you have the more money you will make although it could be said that by not
considering order flow a trader is making the whole process a lot harder than it already is mainly because if he doesn't, then he
doesn't understand the market mechanics.

Response 3

You're answering your own questions here. By not considering the flow, you are not only making it harder than it is but you are
completely missing out on why certain trades can fall into a high probability category.

I was just at a NinjaTrader partner conference last week. All the partners were walking around with name tags which also had the
company name on it. This woman comes up to me and says, "I need to talk to you. I bought your basic course a couple months ago
and while I see why order flow could be important, I don't understand how to use it." It caught me off guard because I definitely didn't
expect to run into a customer who was also a Ninja partner. I started laughing and I pulled out a pen and some paper and gave her a
quick crash course on one of the ways to use the flow. I'm sharing because I think this helps to illustrate how you can use order flow
in your decision making process but don't have to give up the charts and TA.

Let's say you identify the price of 10 to be a "level". The market is currently trading 12 at 13. You think buyers will step in around 10
should the market get there and you are, of course, hoping those buyers will then take the market up to 20. You have no real
reasoning behind this idea other than a chart pattern that has maybe worked at some point in the past but nevertheless, this is your
style so we'll roll with it. As the market approaches 10, one thing becomes very clear if you are watching the order flow. Limit buy
orders are being worked at 10 and 11 but there are zero buyers interested in aggressively attacking the offers at 12 and 13. The blue
army is just sitting behind the wall. They are not attempting to press the red army back into the battlefield.

If you see this, why would you place a buy order at 10? Why not wait a second and see what happens? If the sellers crack 10 and
you still see zero buyers or very few buyers trying to aggressively attack the new offers at 10 and 9 as the market declines, there's
no point in stepping in front of a train. If anything, you should be looking to go the other way. Let's say you then watch the market
decline to 4 and as soon as it hits 4, you see a whirlwind of buyers aggressively attack the offers at 5 and 6 and now a battle ensues
between 4 and 6. If you're still looking to buy, buy there. Buy once you've seen the blue side fight back. Don't buy as the blue side is
getting slaughtered. The market may not stop at 4 forever but at least you can see some power now and you saved yourself 4 to 6
ticks on the buy side entry which means you saved yourself from a loss which you would have taken right where the market stopped
and turned back in your favor.

It is the most logical thing in the world and yet eludes the masses. I only hit a price when I've seen something which indicates there
should be a lot more power on my side. Or I'm anticipating stop orders being set off or liquidation taking place and I'm looking to get
paid based on those orders carrying the market in my direction. It's easier said than done but I have a viable edge. I know why that
trade worked or did not work and I don't suffer from the delusion that I'm a genius when I'm right. I was right because I know how
orders are placed and executed and I know the majority of volume being worked is being worked based on fundamentals, order flow
and statistics. Not always in that order but those are the main factors. No one moving thousands of contracts on a spread trade in
the NOB or FYT gives a shit about a head and shoulders pattern or plans on catching a 30 tick run on any given day. They are
playing the bell curve (the mean and standard deviations), the order flow and the fundamentals. I'm trying to ride their coattails and
get in front of more orders from HFTs which are also looking to ride their coattails. We are parasites attached to sharks who are
hopefully wreaking havoc on everything in their path. When they eat, we eat. Look for the biggest baddest sharks and try and figure
out where they are going next. They move the market. This is why it's important to understand how they trade.

Comment 4

How does my trading model compare to you as a trader because you often speak of context? What does that actually mean to you?
Are you saying a level is context?

Response 4

Defining a "level" and making decisions based on that level is all about context and the decision to call it a level is too often based on
a subjective viewpoint rather than information which can actually be helpful. If the market is moving down and approaching your
level, you might think about buying because you're looking at a chart pattern and you think there may be some buyers at that price.
I'm not buying at that price until I see an iceberg stop the downward move dead in its tracks and I also see buyers aggressively
attacking offers. We are both making decisions based on an imagined future but I'm not taking action until I actually see something
which confirms the likelihood of my imagined future. Something which says high probability.

You call it a level. Why? Because it's a point on a chart. Someone else calls another price a level because 20K contracts traded
there and only 5K traded at the next price (profile step). I think a profile step level typically holds more water than a chart level
(although they are often the same) but still, the level is just one price out of many. Will that price be important and should you make a
trade based on that level? NOW we're talking! How to know what to do at that magical level. You try to figure out the best play based
on the context of the situation.

I will give you two examples. They are both on my videos page. The "ES trade on Jigsaw" video and the most recent "NinjaTrader
partner presentation" video. If you will watch those (or watch them again), you'll see that in both trade samples, I was making a play
based on a large order sitting on the bid. I could tell the orders were not spoof orders. This comes with experience. Knowing they
were not spoofs, I was fairly certain that if those bids were taken out by a large amount of sell orders, each respective market should
crack, at the very least, 2 to 4 ticks. Beyond that, I do not know. What I do know is that there will most likely be a wave of stop sell
orders hitting the market if those bids get cleared and I want to be in a short trade BEFORE those stop sells hit because those orders
hitting is how I get paid.

Please reflect on the above paragraph for a moment......

That is an edge. That is a high probability trade based on logic, market dynamics and experience. I'm willing to bet real money that
those trades will work more than 50% of the time. Where I go wrong at times (as do most traders) is taking trades which aren't that
clear to me. I lose when I don't wait for my spot or when I chase because I missed my ideal entry prices. I win when I simply wait for
those high probability setups and fire without hesitation. This is why I can gain a win rate above 50% when I'm in the zone and
market conditions are conducive to my style of trading. I know certain trades are truly high probability because I understand how
orders react to the flow.

However, there was a certain context around those trades which gave me the conviction to fire. It's not just the big bid. It's not just
the level. It's what has happened up to that point. There are days when I see a big bid and I do not go against it because the context
doesn't seem right. I may be able to tell that it is unlikely very many stop orders will be triggered because it's a slow day and, really,
who wants to sell here right now? Does anyone need to puke? Probably not. So I lose those sell orders which would help push the
market lower. Does anyone really want to short new lows on the day when they know the bottom has been holding easily and the
world is waiting for a number release tomorrow? Probably not. So I also lose those sell orders which would help push the market
lower. In that situation, I may actually join the big buy order or even step in front of it. Context is king. Who is going to hit the next
price? That should always be the first question in your mind.

Comment 5

So after 6 years of trading and building beliefs, it's fairly tough to then just stare at a ladder with no charts. It's like someone has put a
blindfold on me and said, "Ok. Trade!", and the temptation to revert back to what you know works is strong as I'm in the business of
making money. Therefore, fast tracking this learning curve is very important.

Response 5

Everyone is in the business of making money but, and this is rhetorical, are you making what you want to be making? You say what
you are doing works but how well does it work? If you're trying to improve your results, you have to try something new. If you want to
learn what it's like to identify true high probability trades, you have to try something new. It doesn't mean you have to ditch all TA
even though most of my successful customers do just that eventually. And they were all like you in the beginning. I was like you in
the beginning. You think I don't know all that stuff about win rates and risk to reward and trailing stops and riding trends? I know all of
it and I also know none if worked consistently over the course of many years. Then I landed a job at a prop firm in Chicago and I saw
Trading Technologies' X-trader platform and I was introduced to the idea of order flow. Then I saw a guy make $100,000 in one
month doing nothing but scalping off the DOM. And that's when I put all of my preconceived notions and beliefs aside and admitted
that what I was doing didn't work and what he was doing did. And that's when I started making real money on a consistent basis.
I'm not saying it's the only way to trade or the best way to trade but I am saying anyone who day trades should incorporate some
tape reading into his or her methodology. The benefits can be huge over time. Even if you still want to use TA, you can apply tape
reading in ways like I described under #3 above.

Addendum to Response 5:

This is something I hear all the time from nearly every person who comes to me for instruction.

"You're putting a blindfold on me. How am I supposed to make decisions without charts? I'm too invested. I know that sometimes my
patterns hold up. I'm making money. I'm just trying to improve my results. I'm not looking to completely change my style. How can
you really expect me to stop doing what I've been doing for years???"

My response is always the same. You're obviously not getting the desired results you had hoped for when you started trading. If you
were, you wouldn't be talking to me in the first place. Telling me I'm blindfolding you and you want to revert back to something which
is comfortable is not a response which is based on you wanting to legitimately learn something new. That response is based on you
not wanting to acknowledge that you may have spent years believing in something that has little or no merit. It's an emotional
response. Not a logical response. I know because I've been there myself. I spent years trading and losing and somehow still told
myself I knew something about the markets. I believed I just hadn't found the right pattern yet or the right risk to reward or whatever.
When I first started trading at the prop firm, I was still instituting this same style and making maybe one or two trades a day based on
nothing but technical analysis. In reality, I was basing trades on nothing more than hopes and dreams. I had absolutely no viable
edge of any sort nor did I understand the meaning of high probability.

Take a leap of faith. Try something new. What's it going to hurt? I mean, really. You can spend six months looking at the DOM, decide
you can't do it and aren't any worse off than you are now…or…you can spend six months looking at the DOM and realize you are
finally identifying real high probability trades, getting a grasp on the context of each day and starting to see how you can consistently
make real money.
I only have this issue with people who have been trading for a long time. People who are brand new are not emotionally attached to
technical analysis and they usually progress much faster. If you listen to the interview with Matt in the "interview" starter video, you
will be listening to a young man who basically did everything I told him to do and is now absolutely crushing. I told him to turn off the
charts. He did. I told him to focus only on the treasuries. He did. I told him he was going to have to sit in front of his screen for four
hours every day. He did. He didn't care about what "style" worked. He only cared about making money. He tried technical analysis
and wasn't seeing any results from it so he had no problem letting go of it. He started learning about order flow, took my course,
worked, studied and traded. He learned the virtues of patience and discipline. He gave it his all and now he's reaping the benefits.

As I said in my response, I'm not saying this is the only way to trade or the best way to trade but it is a way which works and learning
something about order flow can only help in the long run. Sometimes we have to take a step back and acknowledge that our current
beliefs and ideas may actually be hindering us from reaching our desired goals.

iv. Summary

High probability trades exist. They are not imaginary. Finding them requires a lot of time and patience as well as a solid fundamental
understanding of how volume influences movement. Risk to reward ratios also matter as does some level of technical analysis at
times. You can't have ten 1 tick winners and then lose 15 ticks on the eleventh trade. We all know this. It's a given. But you also have
to find a viable edge. A means of identifying high probability trades and a methodology for managing them. It is my hope that this
course will help you do that.