How to find high probability setups

Entering trades that have a high chance of winning – isn’t that what we all want from our trading?

Well, surprisingly few traders focus on high probability setups, instead looking at ways to take the smallest possible risk on a trade. That’s not a bad thing – we should always be looking for ways to cut our risk, but if we’re doing it at the cost of actually having a chance of winning – then we’re not doing ourselves any favours.

I can remember as a child putting far too much of my pocket money into those coin pusher machines – it was just 1p coins, and they’d be balanced tantalizingly over the edge of the precipice. The risk I took was small – but I was throwing money into a low-probability set-up, and never came away any richer.

Today I’d like to show you a high-probability set-up which is based around the magnetic pull that key levels have – on prices …

How to find high-probability setups

The setup I’d like to show you relies on a powerful effect that a double-top or double-bottom can have on a trend – even when that double-top or double-bottom is only partially formed.

Why does it have such a powerful effect on the price?

Well, after we’ve had a significant retracement on a trend, the price takes a lot of buying power, with significant momentum, to breakthrough to new highs – and there will be considerable pressure to move back towards that retracement level.

But now we come to a crucial part of high-probability trading – generous stop levels, and modest profit targets.

High-probability trading is all about traders taking regular, small gains, and building a secure base from which to suffer the occasional loss. Because, on an individual high-prob trade, risk will always be greater than reward – this is the smart way to trade.

However, there are clever entry and exit tricks which can boost our risk-reward even in these trades …

So, let’s look at exactly how the setup works …

Because this is high-probability, we don’t have to look hard to find examples of winning trades …

In the example below, we see our double top beginning to form at T2, after a retracement of 60 pips.

This is where our ‘sell’ position begins …

The 60 pip retracement gives us our distance to stop loss – which we put 60 pips above T2.

However, instead of bouncing back at T2, the price forges on upwards.

Do we panic? No, because we’re confident of the strong selling pressure that’ll be acting on that price.

In fact, we’re so confident of that selling pressure, that, when the price has moved halfway to our stop level … we sell again, entering a second half of our sell trade.

So, how do we judge where to take profits on these trades?

The key is that we won’t be greedy – we’re not looking for the price to move the full 60 pips back to the retracement level. Instead, we’ll close half of our trade when it’s back to T2, and half of the trade when it’s moved halfway towards the retracement level.

The result (as it played out in the example above) is around 30 pips profit on each trade, with a combined risk on the trades of around 90 pips (60 pips on one and 30 pips on the other).

Here are some more examples …

Here’s another trade that set up immediately after the last one …

In this example, we didn’t enter the second half of the position, but took around 38 pips profit very quickly, with a risk of 77pips.

And here’s how it works for a buy trade in a downtrend, where we’re looking for signs of a double bottom starting to form …

Of course, they don’t always work out …

Even with high-probability set-ups, you won’t win all the time – and (because of the nature of high-prob trading) – your losers are likely to be bigger than your winners.

For that reason, it’s very important that you’re strict with your stop levels, and cut losses. If the price has moved the wrong way, further than the retracement distance, then the premise of our trade is no longer valid – that price is no longer ‘under the spell’ of those key levels.

Here’s an example of a trade that didn’t go to plan …

Here, both halves of our trade will have taken a loss. The second half of our position is opened closer to the stop level, so this reduces our losses and acts as a buffer zone. Effectively, it cancels out the first half of the trade, but is still playing for some downward pressure on that price.

The trick to getting a really reliable trade on these is to look for substantial retracements between your double-top or double-bottom extremes. If you’re a fan of Fibonacci, then a good measure would be a retracement to the 38.2% line.

The other trick is to manage your risk on these trades – you’ll be trading with wide stops, so keep stakes low. Plus, when you’re entering your trade in two parts like this – remember to half your stake for each trade, rather than doubling up on your risk.

I’d be really interested to hear about any adaptations you might have on these trades – there are plenty of ways they can be beefed up to give more accurate entries … I look forward to hearing how you get on …

To enjoy more content and get it faster Follow @TradersBulletin

Related posts:

How to find high reward trade setups How to profit from double tops and double bottoms – even if they fail