Three High Probability Trading Setups
What are High Probability Trading Setups?
You may wonder: do high probability trading strategies even exist? The answer is yes, because the term simply means going into the market only when there is a high probability of your trade being profitable. In other words, if you apply a strategy only when it’s meant to be applied, you should see positive results.
So what success percentage can you expect? Well, nobody can tell you a specific number because trading is never a sure thing. But if you enter the market at the right time and, as importantly, exit your positions before the market reverses on you, you should be able to see a 60%-70% success rate, which is considered very good.
There are dozens of backtested and widely-acknowledged strategies included in our lessons already, but we decided to additionally mention three simple strategies suitable for those who are only starting to trade the financial markets.
Strategy #1 – The Donchian Channel Bounce and Breakout
For this strategy, first apply the Donchian channel to the chart with length set to 20. The concept of this trading approach is simple — when the price breaks the resistance line, go long, and when it goes below the support level, go short.
On the chart snapshot above, you can see that the resistance was holding the price but then a long green candle tested it and managed to break through. What you should’ve done at that point was to wait for a confirmation from the next candle. If it’s green as well, that’s a signal to open a buy deal. For a stop loss, there are several options. Some set it a few ticks below the breakout candle, but we favour using Fibonacci tools for both stop loss and take profit, and set the stop loss slightly further in case there’s a small correction.
A sell position should be opened under the same conditions, just reversed.
It’s also possible to use the Dorian channel differently and trade based on pullbacks rather than breakouts. The idea is to wait until the price, for example, tests the lower border, failing to break through, and open a buy position expecting a reversal. A stop loss should be placed a few pips below the support level, and as for the take profit, it can be set at the channel’s central line.
A sell position, on the other hand, could be placed when the price tests the upper border but pulls back.
Strategy #2 – Trading Pullbacks in a Strong Trend
It can be hard trading when a market is experiencing a strong trend, because it can remain overbought or oversold for a significant period of time.
“What’s hard about trading such a chart?” you may ask. “I can just go short during a downtrend and go long in an uptrend.”
That’s true, but even a strong trend consists of ups and downs, so there are better and worse places for opening a trade. So what we’ll do is introduce you to a simple strategy of trading pullbacks which, according to some analysts, has a statistical edge in technical analysis.
The first thing to do would be to identify areas of interest, and a tool to help you with that is the Stochastic oscillator. It will show you when pullbacks are about to end so that you can open a deal with the highest potential profit.
When you’re looking for corrections during a downtrend, the best place to open a buy deal would be when Stochastic leaves the oversold area.
For pullbacks while in an uptrend, you would go short when the price leaves the overbought zone.
A stop loss should be set at the next historical support/resistance level, and for the price target we recommend using Fibonacci extensions.
Strategy #3 – The Flag Pattern
The Flag formation consists of two parts: a pole and a flag. The pole is shaped by a strong price movement upwards, accompanied by high volume. The flag part is a subsequent consolidation with smaller volume. Flag patterns are easy to recognise, so they are perfectly suitable for beginners.
Although flags come with retracements of any magnitude, the strongest patterns tend to have retracements less than 23.6%. Once you’ve found a flag, you need to wait for a candle to break out upwards. A confirmation could come in the form of the price continuing to rise during the following candle or volume starting to increase. A stop loss should be set below the low of the flag, while for a take profit you can use the Fibonacci tool.
The flag formation shown on the snapshot is not the only type you may encounter as the flag could also be formed in a downward direction.