“I will be first to admit that charts do NOT forecast price – they show path of least resistance and provide an excellent risk management tool” – Peter L. Brandt
Boolean logic reacts off how the pattern plays out. It is just probabilities not predictions.
Boolean logic is named after a nineteenth-century mathematician, George Boole. What is Boolean logic? It is a type of algebra where all values are either true or false. Boolean logic is used in computer science as it conforms to the binary numbering system that is the language of computer programming. In a binary numbering system each bit of information has a value of either 1 or 0.
How does this type of logic apply to trading? In trading you remove the guessing, predicting, and opinions and instead trade in the language of Boolean logic. For discretionary traders either you have a signal or you don’t. You have a good risk/reward ratio based on your stop loss and open ended profit target or you don’t. Mechanical system traders use pure Boolean logic for their entries, exits, watch list, and position sizing is predetermined and then executed when the signals occur.
Using Boolean logic in trading is much like when a computer program runs, if this, then that. If this happens then I will do this. If my stop loss is hit then I will exit with a loss. If I catch a winning trade in my favor I will let the winner run until my trailing stop loss is triggered. This is the essence of reactionary technical analysis used by many of the world’s best trend traders. Logic is something to think about to replace relaying on emotions, ego, and predictions in trading the markets.
A chart pattern and an entry signal is not a prediction of how a trade will turn out, the future is always unknown. A set up, a break out, or a pattern is just the place that gives you higher odds of success on entry. The reason traders have stop losses is that they do not know on entry whether price will trend to their profit target or reverse and go against them. Stop losses are your risk managers, profit targets are best case scenarios, and position sizing manages your risk of ruin. A signal is just to get you on the right side of the path of least resistance with the current price action, a trailing stop loss is a tool to keep you in that trend until the end when it stops being your friend and bends. Real traders manage their trades as they play out in real time, predictions are for those with egos. Only the present moment ever exists, the future is unknowable.
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.” – Lao Tzu
“If a man didn’t make mistakes he’d own the world in a month.” – Jesse Livermore
