Trading High Probability Consolidations

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High Probability Trading Strategy

Do you want to find high probability trading setups?

I’m sure you do, right? (Or you won’t be reading this right now)

But the thing is…

…you’re not sure how.

Instead of looking at price, you’re looking at indicators (without understanding the purpose of it).

Instead of following trends, you’re trying to predict market reversals.

Instead of proper risk management, you put on a huge bet because this trade “feels good”.

If you’re doing any of the above, then it will be difficult to identify high probability trading setups.

I’ve got good news for you.

Because in this post, I’ll teach you step-by-step on how to find high probability trading setups.

The trend gives you the biggest bang for your buck

The definition of the trend is this…

Uptrend – consists of higher highs and lows

Downtrend – consists of lower highs and lows

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If you want to know where’s the path of least resistance, look left (and follow the trend).

When the price is in an uptrend, you should stay long. When the price is in a downtrend, you should stay short.

By trading with the trend, you can see that the impulse move (green) goes much more in your favor, compared to the corrective move (red).

Here are a couple of examples…

Now you’re probably wondering:

Rayner, identifying a trend looks easy. But how do I enter an existing trend?

And this is what we’re covering next…

Trade in the direction of the general market. If it’s rising you should be long, if it’s falling you should be short. – Jesse Livermore

How to identify areas of value on your chart

You’d probably heard of the saying, “buy low sell high”.

But the question nobody asks is…

…what’s low and what’s high, right?

This is where Support & Resistance comes into the picture.

Support & Resistance

And this is the definition of it:

Support – an area with potential buying pressure to push price higher (area of value in an uptrend)

Resistance – an area with potential selling pressure to push price lower (area of value in a downtrend)

Here’s what I mean…

Dynamic Support & Resistance What you’ve seen earlier is what I call, classical Support & Resistance (horizontal lines)

Alternatively, it can come in the form of moving average. This is known as dynamic Support & Resistance (and I use the 20 & 50 EMA).

This is what I mean…

Not only does support & resistance allows you to trade from an area of value, it improves your risk to reward and winning rate as well.

Now, another “trick” you can use is to use overbought/oversold indicators.

High probability trading — using Stochastic to identify areas of value

A big mistake most traders make is, going short just because the price is overbought, or oversold.

Because in a strong trending market, the market can be overbought/oversold for a sustained period of time (and if you’re trading without stops, you risk losing your entire account).

Here’s what I mean:

Now you’re wondering:

How do I use Stochastic to identify areas of value?

Here’s the secret…

In an uptrend, you only look for longs, when the price is oversold.

In a downtrend, you only look for shorts, when the price is overbought.

Here’re some examples:

If you follow this simple rule, you can “predict” when a pullback will usually end.

So, you’ve learned how to identify areas of value on your chart.

…you’ll learn how to better time your entries.

How to enter your trades

There’re 3 ways you can enter a trade:

Pullback

A pullback is when price temporarily moves against the underlying trend.

In an uptrend, a pullback would be a move a lower.

Here’s an example:

In a downtrend, a pullback would be a move higher.

According to the work’s of Adam Grimes, trading pullbacks has a statistical edge in the markets as proven here.

What are the pros and cons of trading pullbacks?

Advantages of trading pullbacks:

  • You get a good trade location as you’re buying into an area of value. This gives you a better risk to reward profile.

Disadvantages of trading pullbacks:

  • You may potentially miss a move if the price doesn’t come into your identified area.
  • You’ll be trading against the underlying momentum.

Breakout

A breakout is when price moves outside of a defined boundary.

The boundary can be defined using classical support & resistance.

Breakout to the upside:

Breakout to the downside:

What are the pros and cons of trading breakouts?

Advantages of trading breakouts:

  • You will always capture the move.
  • You are trading with the underlying momentum.

Disadvantages of trading breakouts:

  • You get a poor trade location as you’re paying a premium.
  • You may encounter a lot of false breakouts.

Failure test

This technique possibly originated from Victor Sperandeo, and the works of Adam Grimes shows that it has a statistical edge in the markets.

It works like this…

You’re entering your trade when the price does a false breakout of Support/Resistance. Thus taking advantage of traders who are trapped from trading the breakout.

This entry can be applied in a trending or range market.

Here’re a few examples…

Failure test at (BCO/USD):

Failure test at (USD/SGD):

Failure test at (EUR/USD):

Now, the next thing you’re going to learn is…

How to set your stop loss

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined by the maximum dollar amount you are willing to lose. – Bruce Kovner

I’m going to share with you 3 ways to do it:

  1. Volatility stop
  2. Time stop
  3. Structure stop

Volatility stop

A volatility stop takes into account the volatility of the market.

An indicator that measure volatility is the Average True Range (ATR), which can help set your stop loss.

You need to identify the current ATR value and multiply it by a factor of your choice. 2ATR, 3ATR, 4ATR etc.

In the example above, the ATR is 71 pips.

So if you were to place a stop loss of 2ATR, take 2*71 = 142 pips

Your stop loss is 142 pips from your entry.

  • Your stop loss is based on the volatility of the market
  • An objective way to define how much “buffer” you need from your entry
  • It’s a lagging indicator because it is based on past prices

Time stop

A time stop determines when you exit your trades based on time.

Instead of exiting your trades based on price, you exit your trades after X amount of time has passed.

You need to define how much time you will allow before exiting it.

You took a short trade at resistance area. But after 5 days it’s not going anywhere, so you exit your trade.

Pros:

  • You reduce losses
  • If you have trading records, you can identify the optimal amount of time to give your trades

Cons:

  • You may exit prematurely only to see price move in your favor

Structure stop

A structure stop takes into account the structure of the market and set your stop loss accordingly.

Support is an area where price may potentially trade higher from. In other words, it’s a “barrier” that prevents further price decline.

Thus, it makes sense to have your stop loss below Support. Vice versa for Resistance.

Here’s what I mean:

You want to place your stop loss where there is a structure in the market that can act as a “barrier” for you.

Pros:

  • You know exactly when you’re wrong because the market structure has broken
  • You’re using “barriers” in the market to prevent the price from hitting your stops

Cons:

  • You need wider stop loss if the structure of the market is large (this results in a smaller position size to keep your risk constant)

Now, let’s move on…

What is confluence and how it impacts your trading

Here’s the thing:

You’re not going to enter a long trade just because Stochastic is oversold, or the market is in an uptrend.

You’d need additional “supporting evidence” to give you the signal, to enter the trade. And this “supporting evidence” is known as, confluence.

Confluence is when two or more factors give the same trading signal. E.g. The market is in an uptrend, and price retraces to an area of support.

Here’re two guidelines for you:

1. Not more than four confluence factors

The more confluence you have, the higher the probability of your trade working out. But…

In the real world, your trading strategy should have anywhere between 2 – 4 confluence factors.

Anything more, chances are you’re going to get very little trading setups. And it’ll take you forever before your edge can play out.

You can take mediocre trading setups, and still make money in the long run.

2. Do not have more than one confluence factor in the same category

If you’re going to use indicators (oscillators) to identify overbought/oversold areas, then use that only.

Don’t add Stochastic, RSI and CCI because it’ll leave you with analysis paralysis. Similarly…

…adding simple, exponential and weighted moving average on your charts, doesn’t make any sense.

If you’re still reading at the point, you’re in for a treat. Because here comes the exciting part…

A high probability trading strategy that lets you profit in bull & bear markets

And here’s my secret (which is what you’ve just learned)…

  • Trade with the trend
  • Trade at areas of value
  • Find an entry
  • Set my stop loss
  • Plan my exit

If a trade meets these 5 criteria, then its a good trade to me.

Now, let’s learn a new trading strategy, that gives you high probability trading setups.

Here it goes…

If 200ma is pointing higher and the price is above it, then it’s an uptrend (trading with the trend).

If it’s an uptrend, then wait for the price to pullback to an area of support (trading at an area of value).

If price pullback to an area of support, then wait for failure test entry (my entry trigger).

If there’s failure test entry, then go long on next candle’s open (my entry trigger).

If a trade is entered, then place a stop loss below the low of the candle, and take profit at nearest swing high (my exit and profit target).

Vice versa for a downtrend

**Disclaimer: I will not be responsible for any profit or loss resulting from using this trading strategy. Past performance is not an indication of future performance. Please do your own due diligence before risking your hard earned money.

Here’re a few trading examples…

High probability setup at (USB05YUSD):

High probability setup at (USD/SGD):

High probability setup at (GBP/AUD):

Here’s the thing:

You may not be comfortable using my trading strategy because it may not suit you.

So, what you need to do is, “tweak” it into something that fits you. And this is what we’ll cover next…

I don’t think traders can follow rules for very long unless they reflect their own trading style. – Ed Seykota

So, what’s next?

You’ve just learned how to identify high probability trading setups, and how to develop your own high probability trading strategy.

When you trade it with risk management, discipline, and consistency, you’ll greatly increase the odds of becoming a consistently profitable trader.

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SPES High Probability Intraday Trading System

Before getting started , in case of wasting your time, I would like to remind you that this is an intraday trading system , which means you have to be able to trade at the time when the forex market is in most liquidity, including London time 8:00am to 11:00am and 1:00pm to 4:00pm (which is best with London market and New York market open). I suppose this system could work well on higher time frame for mid/long term trade but I never tried. Moreover, what I share here is a system, not an indicator or a strategy, which means you have to learn and try it (for a long time maybe) instead of simply following signals. This system was not created by me, I learned it from my tutor and would like to share it as he does. It only used simple analysis tools and rules, but it needs patience and discipline when you trade.

In my personal opinion, trading is not easy, especially for independent traders like us. It is irresponsible that simply sharing an indicator, a strategy, or signals here and tell others that trading is as easy as using ATM. I would like to help, but I have to say that not all traders will stick to the system and win. That is forex market, and it may not be suitable to everyone.

Introduction
I am an independent trader with more than four years trading experience. I have started following this high probability intraday trading system since the summer in 2020, and up to date the result is quite good.

I started this forum for two purpose: Firstly, Id like to use this community to push me to keep updating a trading journal. I used to ignore this step but now I realize that a trading journal is essential for success in trading life and I will talk about this later. Secondly, besides trading, I always wish to start a related career with so much spare time. This high probability system is from a Chinese tutor, Yuehua Shao, who learned and combined techniques from many famous trading masters (including Steve Nison, Peter Bain, Cris Lori, Vic Noble, Rob Booker, etc.) Following his spirits, I would like to share this trading system with independent traders around the world through community network just like he does in China.

I suppose that sharing this system would certainly take me much time on writing trading journals and answering questions, but at this start-up step, Id like to share core concepts and try to answer all questions here for free. In the meantime, I am working on preparing detailed training materials and establishing website, you can PM me for more details if you are interested in this system.

Brief to the system
This system uses a trend-following and right-side breakout strategy; therefore, I only try to find entries on one direction based on my daily analysis. It could be working on any forex pairs, and I also use it on gold, silver and oil. Generally, at the beginning of each day, I search all pairs on high time-frame charts (Day, H4) and find several ones with clear direction bias during the day; then I wait for the entry signals on low time-frame (H1, M15, M5) to take entry. If the price goes against me, I would not take any trades or would get a small loss by SL. Normally I could have several chances for entry in one day (especially on Tuesday, Wednesday and Thursday); however, there may be no chances in consolidating market just like it is recently, so it really needs patience.

Trading is an odds game. Though it is called high probability trading system, you cant always win. Ideally, it is possible to get a winning ratio between 60% and 70%, and some traders who strictly stick to the rules could get a winning ratio at around 80% but they take less trades.

Money management is essential to forex trading. I have experience on blowing several accounts, and after that I realize poor money management is the murder but not trading strategies or mindset. Now I follows a simple money management rules, never trade more than 2% risk of my account balance, and only take 1% risk on trades with uncertainty. With 2% risk management, even after five continuous loss, you will still have 90% balance and you may earn this back with next trade. Money management example: for an account with 10,000USD, never trade with potentially loss more than 200USD, the lot size is not fixed but the potential loss. For EURUSD, if your initial SL is 20 pips, take 1 lot trade; if SL is 40 pips, take 0.5 lot. You may find some EA tools to help you calculate this quickly on MT4 platform.

Five Basic Technical Tools for Analysis
Only five tools/indicators are used for technical analysis by this system, they are all basic to forex trading, including Candlesticks & Chart Patterns, Support & Resistance Levels, Moving Average, Multiple Time Frame Analysis, and Stochastic Oscillator.

Candlesticks Patterns includes Marubozu, Hammer, Shooting Star, Engulfing, Morning & Evening Stars, etc. They are mainly used on higher time frame to determine the direction. Chart Patterns includes Double Tops/Bottoms, Head and Shoulders, Rectangle Patters, Wedge Patterns, etc. They are used on higher time frame to determine the direction and trading room.

Support & Resistance Levels includes Horizontal S&R levels, Trendline, Fibonacci level. They are used to determine if there are enough room for trading.

Moving Average includes 15EMA used as S&R levels and 50SMA used as an reference for direction.

Multiple Time Frame Analysis. With other tools/indicators, we find the trading direction on higher (H4, Day) time frame and entry opportunities on lower (H1, M15, M5) time frame.

Stochastic Oscillator (5,3,3) is only used on H4 chart to support our decision, confirm long when it goes up or above 80, or confirm short when it goes down or below 20. It is only a supportive indicator and sometimes it could be ignored.

Six Steps in A Trade
What I share here is six steps I follow on a trade, these include:

Determine the trading direction: use above tools on higher time frame and decide your intraday trading direction. It is quite simple, and if you cannot confirm the direction just ignore this pair today.

Search the support & resistance levels: find key S&R level on higher time frame to make sure there is enough room for you to trade on your direction. If the range between the price and the level is narrow (normally less than 20 pips), ignore this pair. You may find several suitable pairs after taking 1st and 2nd steps.

Wait for the price going into the key zone: normally these are S&R level tested on lower time frame or high/low of previous day.

Take the entry: when the price breaks out the key level and the SL is reasonable, take the trade.

Manage the trade: manage your trade with the market changing, choose to move SL (to smaller not larger) or close position if price goes with you or potentially against you. I don’t recommend only leaving SL and TP without managing the trade, you may lose less or earn more with active management.

Record your trade on trading journal: I used to ignore this step but I finally realize this is the key to find weakness, be confident, and improve trading skills. After all, for intraday trading in forex market, history always repeats.

All above is the full structure of SPES high probability intraday trading system. For a trading system, of course, above is not helpful enough for you to survive in the market. I will keep uploading sample trades based on real trading, and this will certainly help you understand this system a lot. Please fee free to leave questions and PM me if you want more details about this system.

Once I was told that one had to spent 10,000 hours to be familiar with a skill. That’s a lot! However, if you stick to this system and do 500 serious trades, you may find yourself a different life, so shall we start?

Eight Rules for High Probability Trading
1. Follow the trend on high time frame
2. Have enough trading range between entry price and key S&R level
3. Reasonable risk – reward:risk ration should be more than 1:1
4. Right-side trading – only trade breakouts
5. Price has tested key level before breakout
6. Candlesticks pattern supports trading direction
7. Indicators support trading direction (H4 Stoch, lower time frame MA)
8. Price has a fake/cheat movement before breakout

Few breakouts could satisfy all eight rules but if you only take trades with eight rules you are likely to get a very high win ratio. Normally top four rules must be satisfied and the more conditions met the higher probability to win. Try to filter fake breakouts with these rules above.

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:

Trading High Probability Consolidations

There is a natural desire, especially by beginning traders, to want to trade excessively. This is not difficult to understand. A day trader cannot make money unless he or she is in a trade; this is the general outlook of most novice day traders. But this line of thinking has some serious faults, and it is important to learn to select your trades in a systematic and emotion free state of mind.

Of course, selecting high-quality trades is easier said than done. At various times, very unproductive trades form set up patterns that can be very enticing. Low probability trades are like the lure of Medusa, they look great at first glance, but can cause serious losses if systematic analysis of the trade is not undertaken.

How do you know the difference between a high probability trade and a low probability trade?

First and foremost, every day trader must make an assessment of whether the trade is with the trend or against the trend. While many popular courses on trading tout the wisdom of trading retracements and identifying peaks and troughs in trading patterns, these are all unsound trading methodologies and I know of few successful day traders who employ them. Great traders are masters at taking what the market offers, and not trying to create trading opportunities themselves. A novice trader’s ability to effectively identify trending patterns is an essential skill because the very best traders trade primarily with the trend. In my view, less than 10% of your trades should be countertrend trades.

Secondly, many novice day traders and a plethora of trading systems rely heavily upon oscillators and indicators to choose potential trades. On the other hand, most seasoned day traders pay close attention to actual price action when trading. Important principles like support and resistance are prime movers in determining whether a trade has real potential. For example, taking a short trade into a known support is the recipe for a losing trade. Obviously, a successful day trader must have the ability and experience to identify known areas of support and resistance to avoid taking trades into these hazardous trading zones. Most experienced traders can spot support and resistance by glancing at a chart; this skill is learned through observing thousands of charts throughout trader’s career.

Of course, there are add-on programs to most charting platforms that can spot support and resistance for a day trader who has not acquired the ability to identify support and resistance on his or her own. For some, these add-on programs can be very effective and helpful. In any event, any trade that will lead a trader prematurely into known support or resistance is often a trade that is doomed to failure and it’s important to realize these trades are very low probability in nature. In short, price action is where the real trade selection takes place, and indicators and oscillators supply filtering information to reinforce the strength or weakness of the trade under consideration.

This is among the most difficult concepts to learn in trading, as many day traders are looking for a magic oscillator or indicator that will revolutionize their trading results. I am sorry to report that, to date, no such magical oscillator or indicator exists. Look to identify solid trades in the price action of any chart, and then calculate the potential to profit by identifying where support and resistance will affect the performance of your trade. Many traders use pivots and other predictive indicators to calculate support and resistance. For many years, I was in this camp. As I have grown older, I prefer to identify support and resistance as it develops on the chart, not through some artificial predictive means. This attitude is subjective in nature, and his a choice each individual trader has to make.

In summary, we have looked at trading against the trend and concluded that countertrend trading results in low probability trades, on the other hand trading with the trend results in higher probability trades. We have also noted that known support and resistance are prime movers in determining the feasibility and potential profitability of any trade. Price action is the name of the game, and learning to read and interpret what price action is telling a day trader is the real secret to trading success. If you can master reading price action, it is highly likely you can become a successful day trader.

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