High probability trading strategy

Regardless of which market you trade - forex, stocks, or futures - every market instant is your chance to trade. Yet it is hard, indeed, to chance upon a high probability trade. If you wish to get returns for your effort and time, and want outcomes to be in sync with your trading plan, you have to apply a step by step test . This holds good, for swing traders, day traders, or investors.

The first step: the trader set-up

The setup is the ground realities that would support a trade. For instance, if you are a trend following trader, then a trend must be there for us to examine. The trading plan ought to have a good idea of what a tradable trend is. There’s no purchase in trading in the absence of a trend.

The second step: the trade trigger

You must have a reason to trade, besides an event that would signal the time to trade.

There are traders who prefer to buy once the price has pulled back or ranged. There are traders angling to buy during a pullback. Thing is, you have to isolate the very events you are looking for, then move on to the subsequent step.

In an instance there could be three possible trade triggers that happen during a stock uptrend. The trading strategy defines the trade trigger. One could be a consolidation near support. When the price moves above the high of the consolidation, the trade is triggered. Another trade trigger would be a bullish engulfing pattern in the vicinity of support. When the bullish candle forms, a long is triggered. A rally to a new high price following a range or pullback, would be another trigger to buy.

Ascertain that the trade is worth taking, before a trade is taken through. You know with certainty where your entry point is well in advance, thanks to a trade trigger. For instance, a trader would be sure that throughout July, a possible trade trigger is above the June high.

This enables the checking of the trade for validity, with steps three to five, well before the trade is taken.

The third step: the stop loss

To produce a good trade you need more than the right trading conditions and your trade trigger. A stop loss order must oversee risk management. Placing a stop loss involves many options. A stop loss is often placed just slightly below a recent swing loew, for long trades. For short trades, just slightly above a recent swing high.

Incidentally, the Average True Range(ATR) Stop Loss is concerned with placing the stop loss order a specific way from the entry price.

Calculate where your stop loss will be. When you know the entry and stop loss price, you have a handle on the position size of the trade.

The fourth step: the price target

You are sure of the trade preconditions being present. You also know where the entry point and stop loss will go.

A profit target is always scientific. Chart patterns give targets based on pattern size. Trend channels show precisely where a price can reverse. You ought to set a price target near the top of the channel, provided buying is near the bottom.

Your profit target has to be in sync with market tendencies. A trailing stop loss helps exit profitable trades. When using a trailing stop loss, your profit potential will remsain a mystery. Good thing, too - for the trailing stop loss permits you extract profits from the markets in a truly systematic fashion.

The fifth step : the reward-to-risk

Make the effort to take the trades only where the profit potential exceeds 1.5 times the risk. For instance, losing $100 if the price reaches your stop loss translates into you making $150 or more, in case the target price is reached.

When using a trailing stop loss, you’d be unable to calculate the reward-to-risk on the trade. The profit potential must always outweigh the risk.

When the profit potential is similar to or lower than the risk, avoid the tradd. You may be baulked of the prize at the last stage. However, this is a necessary evil. Good trades surely compensate for such unpleasantness.

Conclusion

You’ll be making sure fundamental news events don’t cash with the action of the test. Then you can take heed of triggers that must actually warn you that the time has come to act. Reward must be greater in magnitude than the risk. You will get the hang of this test in a while. Then the test will become second nature to you - part and parcel of a winning trading plan.