Trend-First Probabilistic Market Analysis
Identify the trend, map the probabilities, and act without pretending to predict
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 97%
Begin with observable price behavior rather than a forecast or compelling narrative. Identify the prevailing trend, select a time horizon, and estimate whether continuation or reversal is more probable based on historical evidence. The horizon matters because short-term returns may mean revert while six- to twelve-month behavior can exhibit momentum. Translate the probability assessment into a risk decision by comparing the likely reward with the cost of being wrong. Establish the acceptable loss before entering, then remain disciplined rather than changing the rules after the position moves. The framework does not claim certainty; it uses trends as an information-processing mechanism and treats every position as a bounded wager whose thesis must be revised when the evidence changes.
Origin
Extracted from Masters in Business, where Jeff deGraaf explained how technical analysis helps him identify trends, estimate probabilities, and manage risk without claiming to predict the future.
Core principles
- 01Treat technical analysis as probability analysis, not prophecy
- 02Assume established trends persist until evidence changes
- 03Start with price evidence before constructing an explanation
- 04Match momentum signals to the relevant time horizon
- 05Define downside before committing capital
How to run it
- 1
Select the horizon
Define whether the decision concerns days, months, or years. Interpret momentum and mean reversion only within that horizon.
Pro tip Write down the intended holding period before reviewing signals.
Watch out A signal that works over twelve months may fail over one month.
- 2
Identify the dominant trend
Measure whether price is advancing, declining, or changing state. Give the established trend priority over isolated countertrend readings.
Pro tip Check the trend across related assets or sectors for confirmation.
Watch out Trying to call mean reversion without first identifying the trend can create repeated losses.
- 3
Map the probability range
Use historical evidence to distinguish the most likely outcome, the least likely outcome, and plausible alternatives. Do not reduce uncertainty to a single confident forecast.
Pro tip Express the assessment as scenarios with approximate probabilities.
Watch out Technical evidence identifies opportunities; it does not guarantee future prices.
- 4
Compare reward with risk
Evaluate whether the potential payoff compensates for the probability and size of a loss. Reject trades whose economics remain unattractive even when the thesis sounds persuasive.
Pro tip Think in terms of poker pot odds rather than whether you feel certain.
Watch out A high win probability can still be a bad wager when losses dwarf gains.
- 5
Define the loss boundary
Specify how much the position may lose and what evidence invalidates it. Size the position so that this loss is tolerable.
Pro tip Quantify the loss before placing the trade.
Watch out Seat-of-the-pants risk decisions invite rationalization after entry.
- 6
Update with new evidence
Maintain the position while the trend and expected value remain favorable. Reduce, exit, or reverse it when the measured evidence changes.
Pro tip Schedule reviews at intervals appropriate to the selected horizon.
Watch out Do not abandon a valid long-horizon signal because of ordinary short-term noise.
In the wild
Gold establishes a durable positive trend, but analysts disagree whether currencies, negative interest rates, or another catalyst is responsible. Rather than waiting for a definitive story, an investor treats the trend as evidence that informed market participants may already be responding to something important, sizes the position within a predefined loss limit, and monitors continuation.
→ The investor can participate in the trend while remaining explicit about uncertainty and risk.
A stock has performed strongly for one month and over the preceding twelve months. The analyst avoids assuming both signals mean the same thing: the one-month move may be vulnerable to mean reversion, while the twelve-month record may support continued momentum. Position timing and holding period are adjusted accordingly.
→ The decision avoids fading a persistent trend merely because the asset looks strong over a short interval.
Common mistakes
Treating charts as prophecy
Technical analysis measures trends and opportunities; presenting it as certain prediction creates false confidence and weak risk controls.
Ignoring the time horizon
Calling an asset momentum-driven or mean-reverting without specifying the measurement window mixes signals with different historical behavior.
Fading strength without trend context
An overbought or strong asset can remain strong when momentum is persistent, so a countertrend position needs more than an extreme reading.
Is it for you?
Best for
It is best for investors and analysts making repeatable decisions across equities, bonds, currencies, or commodities.
Not ideal for
It is not ideal for investors unwilling to define losses or change positions when market evidence shifts.
From the transcript
“I see technical analysis as identifying trends, identifying opportunities within those trends, and taking advantage of them.”
“You start with the evidence in the data, you lay out what's most likely, least likely in everything in between, and that colors how you…”
“The probabilities, overwhelmingly, whether it's academic research our own research, are that there's a persistence and trends in the market.”
From the episode
Interview With Jeff deGraaf: Masters in Business (Audio)