Boundary conditions are a term I use in trading to denote situations in the market that delineate the positive and negative outcomes of a trade. Suppose you are waiting for the RSI to reach oversold territory, and upon reaching this event, you make a purchase. There are two outcomes: either you are in profit or in loss. In both cases, it is desirable to attribute some characteristics to the price movement to understand why the price moved in that direction, beyond the indicator value. For example, the appearance of green candles.

Definition

In other words, you will know that you reached oversold territory, then green candles appeared, you entered the market, and got the desired result. If the result is negative, questions arise:

• How many consecutive losses can you incur in repeating a similar situation?

• How often do such situations occur, and what negative impact do they have?

This forms the basis for boundary conditions; you measure the time interval, count how many times your signal appears during this interval, and calculate the number of wins and losses.

Next is the analysis queue.

If your losses never occur consecutively or each of your wins guaranteedly exceeds the incurred loss several times, then there’s nothing to worry about. However, practice shows that this is not the case. Calculate the periodicity of the appearance of all your signals, see if it coincides with the time you plan to spend in the market. Look at the periodicity of negative signals and their total volume, measure the time it takes to recover losses, and ask yourself if it satisfies you. If yes, all you have to do is trade. If not, you need to either replace the signal or make it more universal and then repeat the described procedure.

When you get the perfect signal, it’s time for boundary conditions.

Boundary conditions can be of two types: geometric and volumetric.

Geometric boundary conditions: Geometric boundary conditions are based on the simple principle of waiting rather than reacting to losses. Consequently, boundary conditions reduce to waiting for the moment when you do not enter the market immediately but wait for options when you miss a certain number of negative entries. It is crucial that the incurred negative results do not violate your understanding of what is happening in the market. If it does, go back to the beginning and work on the signals and their analysis again.

Volumetric boundary conditions: Volumetric boundary conditions are based on the principle of increasing trading volume in the event of favorable developments. In other words, you must always increase your existing position volume with each signal if the price moves in your direction. Of course, this should not make you forget about timely position reduction.

Prerequisites for the existence of boundary conditions:

Boundary conditions must describe processes in which, despite a clear action plan, market dynamics will lead to negative results. To formulate these results, we must have a clear understanding of market behavior leading to profit. Then, simply negating it will provide us with the necessary boundary conditions.

Conclusions:

Formulating boundary conditions requires in-depth knowledge of the financial instrument. Furthermore, I consider the formulation of such conditions beneficial because they help you better understand your market picture and quickly signal unexpected situations, much faster than the state of your account. The practical observance of boundary conditions remains an open question because waiting time may equal missed profit. Even strict adherence to boundary conditions does not guarantee their immutability. In the end, it becomes a matter of choice, which is natural in trading.