Certainly, you're in the right place if you're seeking to discover high-probability trading setups and develop effective trading strategies. This post will guide you through the process step by step so you can leave behind the common pitfalls such as relying solely on indicators without a clear understanding of their purpose, attempting to predict market reversals instead of following trends and neglecting proper risk management for the allure of a "good feeling" trade.

By following the guidance in this post, you'll be better equipped to identify and capitalize on high-probability trading opportunities, ultimately advancing your trading expertise.

Here's what you'll learn:

1. Why trading with the trend increase your returns and reduce your risk

2. How to identify the best areas to trade on your chart

3. How to trade pullback, breakouts, and the failure test pattern

4. How to set a proper trading stop loss so you don't get stopped out "too early"

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

Are you ready?

Then let's begin…

The trend gives you the biggest bang for your buck

You've summed up the essence of trend trading quite succinctly:

• A sequence of higher highs and higher lows characterizes an uptrend.

• A series of lower highs and lower lows define a downtrend.

Following the path of least Resistance by looking to the left and aligning with the prevailing trend is a fundamental principle in trading. When the price is in an uptrend, taking long positions is advisable; when the price is in a downtrend, short positions are favored.

Trading with the trend can be highly advantageous, as the impulse moves in the direction of the trend (green) tends to offer more substantial opportunities compared to the corrective moves (red), making it a key strategy for traders seeking to maximize their gains.

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've brought up a fundamental concept in trading – "buy low, sell high." However, what constitutes "low" and "high" often remains a key question. This is where the concepts of Support and Resistance come into play:

• Support represents an area in a price chart where potential buying pressure is expected to emerge, pushing the price higher. It's often considered an area of value in an uptrend, indicating where traders might look to enter long positions.

• On the other hand, Resistance signifies an area on the price chart where potential selling pressure is likely to arise, causing the price to move lower. It's seen as an area of value in a downtrend, guiding traders on where to consider short positions.

Understanding and identifying support and resistance levels is a crucial skill for traders, as it helps them determine suitable entry and exit points, ultimately contributing to the successful execution of the "buy low, sell high" strategy.

Here's what I mean…

Dynamic Support & Resistance

What you've seen earlier is what I call classical Support and Resistance (horizontal lines)

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

This is what I mean…

Not only do Support and Resistance allow you to trade from an area of value, but they also improve your risk-to-reward and winning rate.

Watch this training video below and learn how:

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 because the price is overbought or oversold.

Because in a strong trending market, the market can be overbought/oversold for a sustained period (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…

Are you ready?

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 are some examples:

Following 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'll learn how to time your entries better.

How to enter your trades

There are three ways you can enter a trade:

1. Pullback

2. Breakout

3. Failure test

Pullback

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

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

Here's an example:

And…

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

An example:

Trading pullbacks, as advocated by experts like Adam Grimes, is a strategy with a statistical edge in the markets. It involves capitalizing on temporary retracements in price within a prevailing trend. Here are the advantages and disadvantages of trading pullbacks:

• Advantages of trading pullbacks:

1. Favorable Trade Location: When you trade pullbacks, you're buying (or selling, in a downtrend) into an area of value. This provides a more advantageous risk-to-reward profile for your trades as you're entering a point where the price is more likely to reverse and move in your desired direction.

• Disadvantages of trading pullbacks:

1. Potential Missed Moves: One drawback of trading pullbacks is that you may miss out on certain market moves if the price doesn't retrace into the area you've identified. Pullbacks don't happen with every price movement, and you must exercise patience while waiting for these setups.

2. Trading Against Momentum: Pullbacks often involve trading against the underlying momentum of the market. While this can offer excellent risk-reward ratios, it also carries the risk that the momentum may continue, leading to potential losses if the pullback doesn't materialize.

In summary, trading pullbacks can be a powerful strategy, offering good trade locations and attractive risk-to-reward ratios. However, it requires patience and risks missing out on moves if pullbacks don't occur. Additionally, you may be trading against the prevailing market momentum, which can result in potential challenges.

Breakout

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

The boundary can be defined using classical Support and Resistance.

Breakout to the upside:

Breakout to the downside:

You're wondering:

What are the pros and cons of trading breakouts?

• Advantages of trading breakouts:

1. You will always capture the move.

2. You are trading with the underlying momentum.

• Disadvantages of trading breakouts:

1. You get a poor trade location while paying a premium.

2. You may encounter a lot of false breakouts.

Read The Definitive Guide to Trading Pullbacks and Breakouts for a more in-depth explanation.

Failure test

This technique possibly originated from Victor Sperandeo, and the works of Adam Grimes show 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 are a few examples…

Failure test at (BCO/USD):

Failure test at (USD/SGD):

Failure test at (EUR/USD):

For further explanation, watch this training video below:

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 three ways to do it:

1. Volatility stop

2. Structure stop

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

Volatility stop

An indicator that measures 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.

Pros:

• Your stop loss is based on the volatility of the market

• An objective way to define how much "buffer" you need from your entry

Cons:

1. It's a lagging indicator because it is based on past prices.

Structure stop

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

An example…

Support is an area where the price may trade higher. 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.

Below is a training video that explains this concept in more detail…

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)

If you want to learn more, read 13 ways to set your stop loss to reduce risk and maximize profits.

Now, let's move on…

What is confluence, and how does it impact your trading

You've highlighted a crucial aspect of trading – the importance of confluence. Confluence is seeking multiple supporting factors or evidence before entering a trade. It's not enough to rely solely on one indicator or signal, even if it appears strong.

For example, if you're considering a long trade, you would want to see confluence, which might include factors such as:

• Market Trend: The market is uptrend, indicating a bullish bias.

• Price Action: The price retraces to an area of Support where historical buying interest is likely to exist.

• Technical Indicators: Stochastic or other technical indicators align with a potential buy signal.

By waiting for confluence – the convergence of multiple factors – you enhance the probability of a successful trade and reduce the likelihood of entering positions based on isolated, potentially misleading signals. This cautious approach is a hallmark of a disciplined and effective trading strategy.

Here are two guidelines for you:

1. Not more than four confluence factors

You're right; achieving the right balance between confluence and the number of factors is crucial in the trading world.

While having more confluence factors can increase the probability of a trade working out, too many factors can lead to infrequent trading setups. This can result in lengthy inactivity as you wait for your perfect confluence.

In practice, most successful trading strategies aim for a moderate number of confluence factors, typically in the range of 2 to 4. This allows for a reasonable frequency of trade setups without compromising the quality of the trades. It's about finding a sweet spot that balances the need for high-probability setups with a reasonable trading frequency.

Furthermore, it's worth noting that even with a few confluence factors, you can still make money in the long run by effectively managing risk, adhering to a sound trading plan, and practicing good discipline. It's a reminder that you don't need every trade to be perfect; consistency and prudent risk management are often more critical to long-term success.

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

You're emphasizing an important principle in trading - avoiding over-complicating your strategy with too many indicators or redundant tools. Analysis paralysis, as you mentioned, can be a significant hurdle for traders.

Sticking to one indicator for specific purposes, such as identifying overbought or oversold conditions, can help streamline your decision-making process and make your strategy more focused.

Simplifying your chart setup using a single type of moving average, whether simple, exponential, or weighted, can help reduce clutter and make it easier to spot significant price movements and trends.

By keeping your trading strategy straightforward and free from unnecessary complexity, you can achieve better clarity in your decision-making process and avoid the pitfalls of overanalysis, which can lead to missed trading opportunities or costly mistakes.

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

And here's my secret (which 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 five criteria, it's a good trade.

Let's learn a new trading strategy that gives you high-probability trading setups.

Are you ready?

Here it goes…

You've outlined a clear and concise trading strategy, a great approach for trader simplicity, and a systematic way to make trading decisions. This strategy is primarily trend-following and involves key steps:

• Identifying the Trend: You determine the trend by checking whether the 200-period moving average (200MA) is pointing higher and whether the price is above it. An upward 200MA and prices above it signify an uptrend, and vice versa for a downtrend.

• Identifying Areas of Value: In an uptrend, you wait for price pullbacks to areas of Support, which is the entry point when the market is at an area of value.

• Entry Trigger: You wait for a failure test entry, your entry trigger. This is looking for specific price action that indicates a potential reversal.

• Trade Entry: If a trade setup aligns with your criteria, you enter the trade on the next candle's opening.

• Risk Management: You set stoopings below the candle's low to manage risk and the candle's low-profit order at the nearest swing high as your profit target.

This strategy provides a systematic approach to trading based on trend analysis, key levels, and price action. Traders must understand strategy, and conducting thorough testing and risk management is wise.

The disclaimer you included is important, as it highlights the inherent risks in trading and reminds traders to exercise caution and perform their due diligence. Trading strategies should always be tested and adapted to individual trading preferences and risk tolerance.

High probability setup at (USD/SGD):

High probability setup at (GBP/AUD):

If you want to learn more forex strategies, read Forex Technical Analysis That Works.

Here's the thing:

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

So, you need to "tweak" it into something that fits you. And this is what we'll cover next…

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

How to develop a high-probability trading strategy (a template you can use)

You can "mix and match" different trading techniques I've shared with you earlier.

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

1. How are you going to define a trend?

You can consider moving average, trendline, structure, etc.

2. How are you going to define an area of value?

You can consider dynamic Support and resistance, weekly highs/lows, Stochastic, etc.

3. How are you going to enter your trade?

You can consider pullbacks, breakouts, failure tests, moving average crossover, etc.

4. How are you going to exit your trade?

There are many ways to exit a trade. Read 13 Ways to Set Your Stop Loss to Reduce Risk and Maximise Profits to learn more.

5. How much are you going to risk on each trade?

I suggest risking no more than 1% of your account on each trade to avoid the risk of ruin.

6. How are you going to manage your trade?

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

7. Which markets will you be trading?

Are you focusing on one market or many markets?

You want to know the correlation between markets if you trade various markets.

If you can confidently answer these seven questions, you're on track to developing one of your high-probability trading strategies.

FAQ

So, what's next?

You've just learned how to identify high-probability trading setups and how to develop your 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.

These apply to various markets—when you're developing forex strategies or even stock trading strategies.