Tried and True Methods
In this final post about higher probability, I want to wrap up what we can look for to increase the odds of a successful trade.
Why are the probabilities increased following this method? Simple. In trading, while there are many ways to accomplish something, there are a few tried and true (and dare say trusted) methods that the majority of traders use. I think a huge percentage of traders are very familiar with:
- Support and resistance via horizontal lines
- Support and resistance via trend lines
- Fibonacci levels
- Moving averages
Trades look to take trades in various areas of the charts for many reasons but the four listed above, are talked about in almost every forum and every trade book you will ever see. Why this is a good thing is because you certainly need other traders to help move the market and if you can zero in where many will be looking to establish positions, do you think your odds are better? They certainly are.
You can take that one step further by zeroing in on area where traders of varying technical abilities are looking to take positions. When you combine 3-4 of those areas above and they match up at a certain price level, that price may have much more meaning then simply being an area where just one technical variable exists.
On the chart below, I have overlaid a 50 period SMA, Fibonacci and a trend line.
You can see price pulled right back to the SMA , Fib and trend line not just once, but twice. You can even see price spike down into the 38.2% level. Of course, you will have your own method of entering this trade. It could be a 1-2-3 reversal or a drop to a lower time frame and finding some other criteria. The point is, we have a confluence of technical factors coming into play at a price range of about 35 pips. Even before price gets there, can you see how “planning ahead” may get you interested in that zone and have an alert set?
Let’s look at another one.
This chart has price pulling into a Fib level, Moving average and a support/resistance level (dashed line). You can see that when price reached this level, the bears came into the fight. After a period of battle, the bears took over and brought price back down 180 pips after reaching this level. Interesting enough, the drop stopped at 5700 which is another price point to watch for….the round numbers.
Interesting? You bet it is. Once you are in tune with this, you will find other ways to take advantage of the “obvious areas” that a confluence of technical indicators show such as stop runs to pick up an extra 30-50 pips as traders target these areas. That is way beyond the scope of this post but something to keep in mind. You can certainly use this information, along with trader psychology, to develop an extremely high probability trading strategy.
Does it always work? No, nothing does and that is why you never forget that risk is vital to surviving in trading. It is also why you don’t just enter a trade at these levels. It pays to find a reversal pattern of some sort on that time frame or lower (I prefer lower for a lower risk profile and bigger position size). It doesn’t have to be anything exotic as a 1-2-3 reversal or trend line break will suffice.
Trading is about probabilities. This “method” is all about stacking the probabilities in your favour and taking advantage of the methods other traders utilize. Go through past data using this information and see if you can find a common denominator when price reversed and see if you can develop your very own strategy of trading.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.