High Probability Trading would be the closest thing to a forex holy grail, right? Maybe not.
But what is high probability trading and what does it involve? Are there any high probability forex trading strategies around?
Well, let see, shall we?
But before you go any further, you need to understand what high probability trading is.
Table Of Contents
- Definition of High Probability Trading
- High Probability Trading Setups-How and Where Do They Form?
- Examples of High Probability Trading Setups On Support And Resistance Levels On Larger Time frames
- Who Wants To Trade High Probability Trading Setups in Weekly and Monthly Charts?
- How To Trade High Probability Trading Setups On Larger Timeframes
- What Forex Trading Strategies Are Suitable For Trading High Probability Trading Setups?
- Further Notes On High Probability Trading On Larger Timeframes
Definition of High Probability Trading
Here is the definition of high probability trading: trading only when there’s a very high chance of your trade being a winner.
So what percentage success are we talking about here? As a matter of fact, nobody can tell you what percentage of trading success rate would count as high probability trading.
But if someone has a 90 + % trading success rates, that would be really good trading system to have. But that fact is they are very few or very rare indeed.
Generally speaking, trading success rates of 60%-80% would be considered high probability trading.
Why? Well, its more than 50% chance of success, isn’t it?
High Probability Trading Setups-How and Where Do They Form?
In my humble opinion, I believe that these two things below make or form high probability trading setups:
- Support and Resistance Levels
- Larger time frames like daily, monthly and weekly
Now, you may have a different opinion about this so you don’t really have to believe what I say.
What are my reasons then?
Well, in terms of support and resistance levels, these levels stand out. Every Tom, Dick and Harry traders in the world can see it.
The big financial institutions that trade the forex market can also see it. So the natural human response kicks in and prices behave predictably when it hits levels of support or resistance.
Now, I also am of the opinion that support and resistance levels you see on smaller time frames are not as important as those seen on the larger time frames.
Therefore, the larger time frames play a significant role in this argument that high probability trading setups happen in them.
- major trends are so obvious in larger time frames because larger time frames reduce the “noise” that is so prevalent in the smaller time frames
- support and resistance levels in larger time frames stick out/stand out. They can be seen clearly by every trader.
Examples of High Probability Trading Setups On Support And Resistance Levels On Larger Time frames
I will show you a few examples of how prices react to support and resistance levels on larger time frames so you will understand what I talking about and I may just turn you into a believer.
This first chart below is of GBPUSD on the monthly time frame and what is important to note here is the fact that:
- there were obvious support and resistance levels
- and when price hit those those level, it reacted as anticipated. (Price hits support levels and bounce back up or price hits resistance levels and drops down).
Here’s another example…this is a weekly GBPJPY chart, notice how price behaves predictably?
I can give you a lot of examples in the daily, weekly and monthly charts of how prices behaved when it hit support and resistance levels but seriously, you learn a lot when you do the exploring yourself: check it out…check out the past and you’d be surprised.
Who Wants To Trade High Probability Trading Setups in Weekly and Monthly Charts?
I wont. Would you?
Here’s the problem when you want to trade using the weekly or monthly charts:
- trade setups take “forever” to form.Some of the trade setups will take years to form, to reach those major support and resistance levels
- therefore you’ll trade less.
- your stop loss distance are going to be huge.
So what is the best way to trade these high probability trading setups that happen in the larger time frames?
Well, this next section, I’m going to touch on that one.
How To Trade High Probability Trading Setups On Larger Timeframes
Now, I said previously that trading setups that happen in the larger timeframes take a lot of time to form…years even.
So if you are focused on only trading one or 2 currency pairs, you’d hardly get any trades at all.
But the good news is that there are 20-23 currency pairs that you can monitor to see where price is at in comparison to those support and resistance levels you’ve identified on your charts. With that, the chances of trade setups forming frequently in any of these 20 plus currency pairs increases, but regardless, its still going to be a long wait.
So what is the solution then?
Well, it think you need to separate the high probability trading in larger time frames from your daily or regular trading activity.
What’s that supposed to mean? It means:
- you can have your regular trading activity, like day trading for example and your trading strategies are going to be based on smaller timeframes from a 1 minute up to the 4 hr charts.
- but on the other hand, you also keep an eye on what is happening in the larger timerame, the trading setups that may be forming there. And when the times comes and the setups happen, you should trade them.
So essentially, its like a two separate trading really. The good thing with that is it doesn’t disrupt your regular trading activity.
Are you happy now? Good.
So when the time comes and a trading setup in the larger timeframe is forming, how do you actually take the trade then?
Here’ what I do:
- if I see a trading setup happening in the monthly and weekly and its almost time to take a trade based on that setup, I will switch to a smaller timeframe, either the daily or the 4hr or the 1hr timeframe. I use these smaller timeframes for my trade entries
- or if I see a high probability trading setup on the daily timeframe, I will switch to 4hr, 1hr or even 30 minute timeframe for my trade entries.
There are two reasons why I do that:
- to get better trade entries so that my stop loss distance is tight as possible but not too close to get prematurely stopped out.
- when my stop loss distance is tight as possible, I can increase my contract sizes that I trade (which does not increase my overall trading risk at all)
Here’s an example for a trade I saw forming on the EURJPY monthly timeframe, notice the support level that was broken previously in blue and when price was heading up to this level, I was waiting for it:
So when price was heading up to this resistance level I identified on the monthly chart, I then switched to the 4hr time frame for my trade entry and my sell signal was a bearish pin bar (shooting star):
Now, I only managed to get 145 pips profit on this trade (I was a bit stupid to use my trailing stop too close using the 4hr timeframe…I should have used the daily time frame to trail stop my trade placing it just behind lower swing highs) but what I’d like you to see is what happens next:
That’s a 1900 pips move in 38 days!
Imagine I’f I had just moved my stop loss to breakeven and didn’t bother to trail stop etc and just let the trade run, I would have made that much profit in just over a month.
To put that in perspective, I traded once standard contract for that trade, I could have made $19,000 on that trade.
Here’s an important lesson from that experience:
when you trade in the larger time frame, don’t treat and manage that trade like a trade in a smaller time frame.
If you do, you chance of getting maximum profits from that trade is diminished.
What Forex Trading Strategies Are Suitable For Trading High Probability Trading Setups?
There are some forex trading strategies here that can be used successfully in trading the high probability forex trading setups in the larger timeframes:
- Support and Resistance Trading Strategy
- Trendline Trading Strategy
- trendline breakout trading strategy
- 123 pattern trading strategy
Just think outside the box and a little bit…Use a little bit of imagination when trying and deciding what is the best way to use these forex trading strategies to trade these setups.
Further Notes On High Probability Trading On Larger Timeframes
- There will be times that price will whipsaw around a bit on those identified levels of support and resistance and this may mean you may get stopped out on your first trade attempt but you will notice that after that price will continue in the direction you anticipated.
- so if you get stopped out once, don’t think its over. Keep watching. You may have to take another second trade or 3rd trade before the price moves in the desired direction.
- Learn about price action trading. It will help you greatly in knowing when to get in. My price action trading course if free, have a read and learn.
- Learn about reversal candlestick chart patterns, they really do come in handy in such situations like what I’ve gone through.
Whew! Finally its over, that’s 1,515 words written on this post about High Probability Trading.
Please don’t forget to share, like, tweet or link if you’ve enjoyed it. Means the world to me if you do so that I can be more motivated to write more useful forex trading tips for you. Many Thanks. RKay