Trends that give you the greatest chance to make money

The definition of a trend is:

  • Uptrend - consists of higher highs and lower lows.
  • Downtrend - consists of lower highs and lower lows.

If you want the path with the least resistance, look from the left (and watch the trend).

When the price is in an uptrend, you should be in a buy order. When the price is in a downtrend, you should be in a sell order.

By trading with the trend, you can see the impulse wave (green) go stronger in your favor, compared to the retracement wave (red).

Below are a few examples

Now, you're probably wondering: "Identifying a trend seems easy, but how do I enter a trade with an existing trend?"

"Trade in the general direction of the market. If it rises, you should buy, if it falls, you should sell." - Jesse Livermore

How to identify value zones on your chart

You've probably heard the saying "buy at the bottom, sell at the top", but the question no one asks is: "Which bottom and top?" right?

This is where support and resistance come into the picture.

Support & Resistance

And here is its definition:
  • Support - an area of potential buying pressure to push the price higher (value zone in an uptrend).
  • Resistance - an area of potential selling pressure for the price to move lower (value zone in a downtrend).

Dynamic Support & Resistance

What you just saw is the classic support & resistance (horizontal line).

In addition, it can also take the form of moving averages. This is called dynamic support & resistance (and uses the 20 & 50 EMA).

Support & Resistance not only allows you to trade from an area of value but also improves your R: R and winrate.

Now, another "trick" you can use is to apply overbought/oversold indicators.

High probability trading - using Stochastic to identify value zones

A big mistake that most traders make is entering a sell order just because the market is in overbought or oversold conditions.

Why is it a mistake?

Because in a strong trending market, the market can be overbought/oversold for a long period of time (and if you trade without placing a stop loss, you risk losing your entire account).

Now, you might be wondering: How do you use Stochastic for identifying value ranges?
  • In an uptrend, you only look for buying opportunities, when the price is oversold.
  • In a downtrend, you only look for selling opportunities, when the price is overbought.
Here are some examples

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

So, you've learned how to identify value areas on your chart. Now you will learn how to better time your entry points.

How to enter orders

There are 3 ways you can enter the trade:
  • Pullback.
  • Breakout.
  • Test failed.

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

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

For example

And in a downtrend, a pullback will move upwards.

For example

According to research by Adam Grimes, pullback trading has a statistical advantage in the market.

You may be wondering: What are the pros and cons of pullback trading?

Advantages of pullback trading:
  • You get a good trading position when you buy in a valuable area. This gives you a better R:R ratio.
Disadvantages of pullback trading:
  • You may miss a move if the price does not enter the area you have defined.
  • You will be trading against the underlying momentum.

A breakout is when the price moves outside a defined boundary. That boundary can be determined using classical support and resistance.

Breakout to the upside

Breakout to the downside

Advantages of breakout trading
  • You will always catch the move.
  • You are trading the same underlying momentum.
Cons of breakout trading
  • You have a bad trading position.
  • You may encounter a lot of false breakouts.
Test failed

This technique can be traced back to Victor Sperandeo, and research by Adam Grimes shows it has a statistical advantage in the market.

It works like this.

You will enter when the price has a false breakout of support/resistance. Thus, you will take advantage of traders trapped by breakout trading.

This entry point can be applied in both trending and sideways markets.

Here are a few examples.

Failure test on the BCO / USD pair.

Test failed in USD/SGD.

Test failed on EUR/USD.

How to set your stop loss

"Put your stop loss at the point where, if touched, it would reasonably show that the trade was wrong, not at the point determined by the maximum dollar amount you want to lose." - Bruce Kovner.

Share with you 2 ways to do that:
  • Stop-loss based on volatility.
  • Structured stop loss.
Stop-loss based on volatility

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

One volatility indicator is the ATR indicator, which can help you set a stop loss.

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

In the example above, the ATR is 71 pips. So if you place a stop-loss order of 2ATR, take 2*71=142 pips. Your stop loss is 142 pips from your entry point.

  • Your stop loss will be based on market volatility.
  • An objective way to determine how much "cushion" you need from the entry point.
  • It is a lagging indicator as it is based on past prices.
Structured Stop Loss

A structured stop loss will take into account the structure of the market and a stop loss will be placed based on that.

Example: Support is the area where the price has the potential to move higher from here. In other words, it is a "barrier" that prevents the price from going down. Therefore, it makes sense to place a stop loss below Support. Opposite of resistance.

You would place your stop loss where the structure in the market acts as a "barrier" for you.

  • You will know exactly when you are wrong because the market structure is broken.
  • You are using a "barrier" in the market to prevent the price from reaching your stop loss.
  • You need to widen your stop loss if the market structure is large (this will lead to using a smaller position size to keep the risk constant).
What is confluence and how does it impact your trading?

You would not enter a buy order just because Stochastic shows oversold conditions, or the market is in an uptrend. You need more supporting evidence to give you a signal to enter a trade. And this "proof in support" is also known as "confluence".

Confluence is when two or more factors give the same trading signal. For example, the market is in an uptrend and the price retraces to the support zone.

Here are two guidelines for you

1. Do not use more than 4 confluence factors

The more confluence factors you have, the higher your probability of a successful trade. But...

In fact, your trading strategy should only have 2-4 confluence factors.

Moreover, you will most likely get very few trade setups. And you will never see your advantage implemented.

Instead, you can do normal trading setups and still make money in the long run.

2. No more than 1 confluence element in the same category

If you are going to use oscillators to identify overbought/oversold zones, use only 1 indicator.

Do not add Stochastic, RSI, and CCI because it will make you paralyzed in analysis.

Similarly, don't add EMA, SMA, and WMA on your chart, because they do nothing.

A high probability trading strategy that allows you to profit in rising and falling markets
  • Trade with the trend
  • Trade-in value zones
  • Find an entry point
  • Set stop loss
  • Make an exit plan
If a deal meets these 5 criteria, it's a good deal for me.

Now let's learn a new trading strategy that provides you with high probability trading setups. Are you ready?

If the 200 EMA is sloping up and the price is above it, it is an uptrend (trend trading).

If it is an uptrend, wait for the price to pull back to the support area (trade in the value zone).

If the price returns to the support zone, wait for an entry based on the failed test (my entry trigger condition).

If there is an entry point based on the failed test, enter a buy order at the opening price of the next candle (my entry trigger condition).

If a trade goes through, place a stop loss below the low of the candle, and take profit at the nearest swing high (my take profit and stop-loss targets).

Opposite for downtrend.

Below are a few examples...

High probability setup with USD/SGD pair

High probability setup with GBP/AUD

How to develop a high probability trading strategy

You can combine different trading techniques.

But ultimately, your trading strategy needs to answer these 7 questions:

1. How do you identify trends?

You can look at moving averages, trendlines, structure.

2. How do you define the range of values?

You can look at support and resistance, weekly highs/lows, Stochastic.

3. How do you intend to enter the order?

You can look at pullbacks, breakouts, failed tests, moving average crossovers.

4. How do you intend to exit the order?

There are many ways to exit, you can read 13 Ways to Set Your Stop Loss to Reduce Risk and Maximise Profits to learn more.

5. How much will you risk per trade?

It is recommended to risk no more than 1% of your account per trade, to avoid the risk of a stop out.

6. How will you manage the transaction?

Will you scale out or scale in your trades? If yes, how much?

7. What markets will you trade on?

Are you focusing on one or more markets?

If you trade on multiple markets, you need to be aware of the correlations between markets.

Frequently asked Questions

#1: Is it possible to apply these techniques to lower timeframes?

Yes, these concepts can be applied to lower timeframes, as these "patterns" will also show up on lower timeframes. In addition, you will have more trading opportunities in lower timeframes, as markets tend to move faster.

However, remember, if you trade on lower timeframes, you will incur more trading costs and will be more stressful than trading on higher timeframes.

#2: Once the charts are formed, how do you know if the pullbacks are temporary or the trend is about to change?

You never know if the market will have a pullback or a complete trend reversal. However, the range of the candles during the pullback will give you clues.

Usually, during a pullback, the range of the candles is relatively small. Meanwhile, when reversing the trend, the pullback candles tend to be large.

#3: I'm confused about profit target setting?

You can refer to swing highs/lows and resistance/support as your possible profit target areas. If you want to catch major trends then you have to apply a trend following approach - where you won't have a profit target but instead follow your stop loss order.