A Basic Look at How to Differentiate High-Probability from Low-Probability Trade Set-Ups

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Thread: What are low probability trade execution?

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What are low probability trade execution?

What are low probability trade execution?

Low probability trades execution means entering into trades that have very little possibility of yielding positive result in the market. The reason for this type of trade might sometimes pertain to the fact that too much risk is involved in a trade and in some other cases, a trader trades out of mere sentiment and not as a result of adequate market analysis. This is not to say totally that low probability trades are not capable of turning into profits, it is only that they have slim chances of developing into something positive. It is only wise for a trader to stay far away as much as possible from taking low probability trades, a trader should focus more on the brighter side and only take trades with high conversion rate or chances of winning.

Low probability trade execution mentions some situations in which orders are hard to executed. It happens when “bulls” or “bears” are nearly absent. When we sell but no one buys or when we buy but on one sells, it causes low probability trade execution.

Low probability trade execution is very dangerous for traders who are trading with high lot size because here the traders are confused about the market entry and for that probability of profit is very less and thus when traders try to do such trade ,they should be very much careful and should trade with some low lot size and perfect leverage ratio with a strong stop loss so that if the trade order goes against us ,minimum losses can be seen .Some times traders are very much restless and they after waiting also are not getting a proper entry ,thus in such case they get impatience and like that we have to do a good analysis so that the pips profit can be maintained .

The low probability trade execution is a type of trade that is done when there is a low possibility of the trade yielding profits. However some traders still goes ahead and take a leap of faith hoping that the trade may bring some result that is good. Despite the chances of the trade yielding a good result been low.
When traders trade on low probability, they should make sure that they use a proper stop loss and possibly take profits so that if the market eventually goes against them, the stop loss will be there to protect the trade while the take profit will lock in the profits when the market eventually gets to the targeted amount of profits. Traders should use a low lot size too in this type of trading so as to avoid losses that can be devastating

There is low probability trades and high probability trades. The ability to spot them and know which of them is high probability and which is low probability depends on you. No one can teach you that, you have to train your eyes and master your system to know them. High probability trades are trade set ups that when taken the chances of making green pips is high when compared with the possible loss that may occur. Usually within 60% to 90% accuracy. While low probability trades are trade set ups that are likely to hit your stop loss. The chances of making consistent profit with such trades is low. Hence, such trade set ups should be avoided.

If we go ahead with a trade where we have perceived that something might be wrong is dangerous because it is a low probability trade, of all they opportunity that anyone can receive from this business, you should understand how to make a decision that is healthy, low probability trades have many disadvantages between the time you entrepreneur took the trade and when price eventually plays out, the trade that comes within a range for example is generally very bad, you may have carried out good analysis thinking that the price would be able to move in your preferred direction, but the average forex traders don’t even check anything. The only way to increase our low probability trades is for patient to be applied, that is the real deal.

To succeed in forex trading requires the good knowledge of technical analysis and fundamental analysis with which a trader must have gotten a developed personal strategy.For a strategy to be considered good enough it should be able to be delivering 7 wining trades out of every 10.This implies that it is not realistic to have a failure-proof strategy but high probability of winning on a regular basis.
All the analysis that are conducted before entering a trade are to ensure high probability of wining.When all factors are put into consideration and the probability of wining a trade is quite low and thus one goes further to execute such,it is referred to as low probability trade execution.
This is not a good decision but it happens to traders as a result of impatience,greed and indiscipline

Low probability trades are those opportunities that will likely fail in the Forex market, we need to understand that as traders there are things that we can understand which might reduce the potential for money management and trading well, but then we cannot give ourselves the opportunity that can bring losses, but sometimes we have to run into challenges that may be able to make us lose, low probability trades are happening around news announcement period and time that we have observed that there is no much movement on the price charts, these are things that could make us understand the difference between the success and failure, there are people that can make profit from the business because they understand what the opportunity. Sometimes the people that have what it takes in the Forex market because each person has an opportunity to gain something.

If you have low probability trade execution in the Forex market, it means that there are many odds against that trading doing well, the wise trader will automatically avoid those kind of losses in the Forex trading, if you don’t understand what this business well we should always understand that it makes things difficult in the end, when we are trading, and suddenly realize that there are no successful methods in trading Forex market, we may keep guessing until you have undergone training that gives you participants advantage in the Forex market, unfortunately whenever we are trading in the Forex market and do not understand what it means to gain real value for your money, that could already make you lose always. Losing in the Forex market is something that we can experience without challenges and that means we can make us gain better value.

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High Probability Setups

Video Transcription:

Hello, traders. Welcome to the Pro Trader Course and the second module, a pro trader mindset. In this lesson we’re going to talk about high probability setups, and as a professional trader, these are the setups that you are going to be looking for on the instruments that you normally trade. And the reason we are going to look only for high probability set ups is because we are going to choose quality over quantity. Now, what is a high probability set up? A key element in trading is identifying situations in the financial markets that can produce a profitable trade. Now, this can be a breakout of balance over support or resistance or a continuation trade. Now, those are normal set ups. In this course, you are going to learn how to spot the setups that have the highest probability of being profitable. A high probability set up is not only a situation that is profitable to trade but a situation that will have a higher probability of being profitable in the long term.

All right, so not only we are looking for profitable situations to trade, but we are looking for the situations that have the higher probability of being profitable in the long term to trade. Because we are always going to be looking for the same set ups in every instrument and that is what this game is all about. As you know traders look for the same set of over and over on different instruments; this is why we have different styles in trading, some…some are action…I am sorry price action traders, others trade fundamentals or the strace news, other traders are short-term traders, other traders are long term traders, and this is because every single one of them has their own set ups that they look for. And in this course we are going to teach you how to look for those setups yourself.

These set ups are confirmed by not only price action but multiple indications that the trader has chosen to make part of his system or style. And of course we are going to rely abundantly on price action, but we can also confirm the set ups with the support or resistance, daily pivots, monthly pivots, Fibonacci levels or even oscillators. And further on this course, we are going to teach you how to put a system together. They are extremely profitable in the long term. Not all trades are 50-50, and this course will teach you how to find trace that have a probability of success higher than seventy percent.

Now let’s look at a high probability set ups versus unknown high probability set up. Let’s say that we are looking at price action at this moment right here and there we have spotted a very strong level of resistance that price tested ones, twice and now could be testing a third time.

So a normal set up would be to wait for price to hit this level and then go short. But we only have as confirmation this level of resistance, and as you know, price can easily break this level of resistance. If we are professional traders, we are going to look for confirmation that this level is going to find a lot of sellers, and we draw Fibonacci from the high to the low of the move and we realize that this aligns perfectly with the fifth Fibonacci level from the entire move to the downside.

That has been tested once and twice. Not only that we realize that it also…that it’s also the daily pivot. So basically what I’m saying here, is that this zone is going to be watched a lot by sellers. And when price hits this level, this set up is going to have a higher probability to run in our favor that if we only had the level of resistance. So high probability set ups, maximizing your win rate of profitability, in the long run, is not only about risk and money management.

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After all, you have to trade the markets in order to make money. Professional traders look only to trade high probability set ups. They are disciplined and wait for price to hit their entry zones to get the best possible risk to reward ratio on them. But why is it so important to focus only on high probability setups? Why can’t you trade every single set up that you spot on the charts? It’s simple, your win rate. Less trades but more winners equal exponential equity growth. Now you have to burn this in your brain. Less trade but more winners equal exponential growth. We are not looking to trade often. We’re looking to trade good. And here is an example of the importance of high probability set ups. And of course, this is 100,000 equity account with a 1% risk and let’s say that you are trading 22% win ratio set ups. After twenty setups, you could have 4.2% growth in your account.

When I say you could have is because we’re assuming that all of these trades were winners. Remember that not all of them are winners and if you only choose to trade high probability set ups and in this case 79% win rate in only nine trades you have 6.4% growth in your account.

So after nine trades, you have made $2000 more than trading mediocre setups twenty times. And if you decide to look at what happens after 20 trades on a high win ratio set up, you can see that…the growth in your account has more than tripled.

High Probability Trade Setups

I thought I would start this thread after discussions from another. The thread was called Rags to Riches. It basically outlines a Risk Reward system of 2:1. With this high R/R system it is possible to increase a deposit of $50 to $50 000 with 9 Net winning trades. To be able to complete this though it is required that the trades taken (as I mentioned earlier) needs a R/R of 2:1 (you will need a high leveraged account too ie 1:400). In other words the Take Profit needs to be double of what the Stop Loss is. (For full details see thread “Rags to Riches in 10 or 20 trades – Simplicity at its finest”) http://www.forexfactory.com/showthread.php?t=444377

As most experienced traders know this type of trade setup is very difficult to find, especially on a consistent basis. That’s where this thread comes into play. I figure if people were serious in achieving the R/R scenario outlined in Rags to Riches then a discussion could be started (here) about what a high probability trade looks like and how to trade it. I am hoping that people (including myself) will post high probability trade setups so that they may be analysed and eventually traded. For example: If pa is continually challenging a weekly high (or low) and the 4 hour chart and then 1 hour chart is setting up to tipping point of a break out then that in my opinion would be a high probability trade set up. I’m sure we all have had those moments when we were staring at our charts and suddenly a setup pattern emerges and hits us between the eyes. That’s what I’m talking about.

I think I need to stress here that unless you have a good foundation in the FOREX market and are currently profitable in your trading it is ill advised that you waste both resources and the possible emotional energy to attempt these types of trades. but I’m not your mother. By all means follow along and try to learn from what people have to say because that is the point of this thread.

About me. I am still fairly new to FOREX (about four years) and am still learning. I trade profitably from the basics. There is nothing too flash up my sleaves just hard work. I am hoping to attract traders to this thread who have more experience than me so that I can learn from and improve my skills (not to mention to make some money along the way).

So that’s that. I’ll put it out there (my 1st thread) and see how it goes.

Options and Probabilities

The more I talk with traders, read articles and listen to commentators the more everyone seems to be talking about what is the “most probable”. Certainly we all like the thought of being on the right side of a trade and assessing probabilities can play a large part.

Unfortunately, when it comes to options, all too many traders are led astray on the role probabilities play in option trading and end up limiting their chances of success. This article has two objectives:

  1. Discuss Probabilities and Option Trading
  2. Offer suggestions on making winning option trades

Probabilities and Outcomes

Most people believe that when placing a bet with multiple choices it is wisest to take the one with the highest probability. We see this frequently when option traders espouse selling Deep-Out-of-The-Money (DOTM) calls or puts and other strategies as “High-Probability” trades. This is facilitated as most every Broker-Dealer includes “probability” as part of their option trading platforms. One requires no special math skills to determine which of many options trades offer the highest probability. Option probabilities can be just a mouse-click away.

But the real question is “Does knowing the option probability help us?”

When placing bets, or investing, it is NOT the probability of outcome that dictates choice … it is the probability of outcome weighed against the “pay-off” that matters. One cannot make a successful and informed choice until one is given the “pay-off”. It is NOT probability that matters . it is EXPECTED RETURN that matters.

If you take nothing else from this article, take this… When placing a bet, one does not choose the most “probable” outcome; one must choose the most “favorable” outcome.

Let’s look at the simple coin toss to better understand this. We all know that a fair coin toss has a 50% probability of landing either heads or tails. But what if the odds for winning bets on heads were one-for-one (1:1) while the odds for winning bets on tails was only 0.75:1? Though the probability remains the same, the expected return does not. One can expect to break even betting on heads and lose money betting on tails.

One must not just look at the probability of “winning” but compare it to the reward to determine if it is favorable.

So, what do coin tosses have to do with option trading? Very simple … option pricing is 100% about probabilities.

The real difference between options and a coin toss is that expected return is not as easy to calculate. There are numerous possible results. For instance selling a DOTM Call has a fixed return on the profit side, but many possible results on the loss side…including (theoretically) unlimited loss.

In order to calculate the expected return one cannot just multiply the probability by the premium credit. One must also calculate the expected loss return for each strike interval that ends up in-the-money (ITM). It means taking every possible strike for the underlying, calculating the probability associated with that strike, multiplying each strike by its probability, adding them all together and subtracting them from the probability of gain. This is an arduous task (fortunately made easier through calculus).

The Greeks

Consider that the Market makers determine the pricing using very sophisticated statistics and “Greeks”. Most traders are aware of some of the first order Greeks such as Delta, Theta and Gamma … but there are second and third order Greeks most traders never heard of… such as “Charm” and “Speed”. So don’t fool yourself, without advanced training in math, statistics, probabilities and the proper algorithm you cannot properly assess all the factors taken into account in the pricing.

I’ll save everyone a great deal of effort in making these complex calculations and simply state that every option is probabilistically equivalent. Over time, o ne has NO better probability of a GROSS profit on a DOTM option than a DITM option. This may take a little explaining.

Surely, a call that is written 2% DOTM has a much better chance of not being over-run than a call 1% OTM. However, it also has a much lower premium credit. Over time, the extra “over-run” risk of the 1% OTM is compensated for by the extra premium credit gained when it is not over-run. They are probabilistically equivalent.

If I may “hammer this home” by using a Roulette wheel as an example. Bettors can make the equivalent of a DOTM bet by betting on odd, even, red or black. Or they could make the equivalent of an ATM bet by betting on a single number, such as 28. Over time the monetary results will be the same. They will “hit” more often on the red/black/odd/even but will win less when they do. I won’t go into it here, but the “house edge” is the same 5.26% on every bet one can make (actually, there is one bet that increases the “house edge” to 8%, but few make that bet).

Let me also clear up a common misconception about probability and the Roulette wheel. Probability theory DOES NOT predict that everyone will be a loser if they play often enough. Quite the opposite. Even in a game that is purely chance and requires no skill, there will be lifetime winners and lifetime losers. It’s only when these two sets of betters are aggregated will we see the expected result. Probability theory only predicts that, over time, the winners and losers will even out and winners will win 5.26% less than “fair” and losers will lose 5.26% more than “fair”.

If you are not a member yet, you can join our forum discussions for answers to all your options questions.

The House Edge

With this basic understanding of options probability and expected return, let’s look to see if the “high-probability” option trade is, in fact, the “most favorable” trade. To make this analysis we must add in the costs of the trade. We need to move out of theory and into reality … a reality where the Market Maker insists on a “house edge”.

Before I get started, let me say that there are, on occasion, mispriced options. If there is a mispricing it can be exploited. However, this is very rare and most traders aren’t equipped to notice it. So let’s leave that on the shelf and move forward.

Let me use options on SPDR S&P500 ETF (SPY) as my example. I choose this underlying as they are widely traded, liquid and have a very low bid-ask spread. Let’s look at selling a call option. We can compare an At-The-Money (ATM) trade with a DOTM trade. We must remember that the pay-offs are adjusted according to their probability. From a risk/reward perspective on a GROSS return they are equivalent.

Let’s look at the bid/ask of the ATM and the OTM option. Though the bid/ask will vary dependent upon duration (weekly, monthly, etc.) …. for these purposes let’s look a month ahead. Most typically, the option will be priced as follows:

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