Creating High Probability Trades 

To gain the most from any given trade a trader must be mentally prepared before the trade, at the time of entry and the conditions for the exit.  Mental preparation can come in many forms and one in particular is how a trader determines the “highest probability” of any given trade. The preparation and analysis needs to ensure the outcome will produce the desired result.  By doing this up front, a trader can build and maintain a level of confidence and certainty that perpetuates a successful trading career filled with high percentage winners. 

With an ever changing market environment being flexible, developing a reliable analysis and having a predetermined game plan will increase the odds of the overall successful trade. 

It comes down to the areas that are focused through fine-tuning and gaining control of the parts of the trade that can be controlled. If a trader only focuses on the outcome and neglects the other parts emotions have a tendency to build up and the market takes over control of the trade verses the trader being in control. So a good rule of thumb for all traders is put the attention on those things that can be controlled and don’t waste precise time and energy on the areas that can’t be controlled and the outcome will have greatest potential or a higher probability in success.  

So how does one build high probability into the trade?  

One of the primary areas is defining the trade set-up or criteria that must be in place before the trade is taken and any money is put on the line. A trading strategy that can identify the optimal market conditions needed to maximize the trade’s outcome is critical.  Each of the components of the set-up can also be “tweaked” so it draws out a clearly defined signal to enter, maintain or close a trade. Here are four parts that when defined and combined, set the foundation for a great trade. 

First is technical analysis which can have many parts in itself based on a combination of chosen indicators. Testing different indicators together and playing with timeframes can result in fine-tuning entries and exits that result is maximizing the profits. This trial and error takes work and time, but well worth it in the end. Some who have followed this newsletter know I call this “digging”. 

All the great successful traders I have studied have been fantastic diggers.  They watch the market; test a theory and indicators by measuring the percentages of the outcome and look for 80-95% redundancy in a particular pattern, before they add it to their criteria list.  

Second is the fundamental analysis of the overall market or markets that influence the trade and can drive the direction or trend. One market influences another just like one stock can be the leader of an industry sector. So noticing what leads and what follows can add to the strength of the trade’s conviction. It can also add to a trader’s emotional certainty if the pattern is consistent. 

Third are the events that can occur during the trading day.  These can alter, change or increase the directional momentum of the trend and sometimes even shift the markets direction and atmosphere at any given moment. As an example you have seen this when the President speaks or an unpredicted natural disaster strikes in the world. 

I remember several years ago I wrote something that said: “Within the next 10 years we will be able to trade any market anytime around the world.” That prediction came sooner expected and we are in the era now. We are global and global events shape and influence all markets and as traders we have to take this into consideration. 

The last part to work on within the trade is time frames, patterns and cycles that show up. When defining a strategy then uncovering a distinct predicable pattern a trader can now leverage it over and over with the same success.  Many times back testing can help to see the repeats in the cycles and patterns. A great amount of data can be compared and analyzed to determine the trade’s probability but all this takes work and time. However, the rewards are well worth the effort. Many strategies can be fine-tuned with back testing the theory which can determine the percentages to see if it stands the test of time. 

These four parts combined can add to the quality of each trade and quality is where the focus should be. Many high quality trades will reap higher rewards then high amount of low quality trades.   

There is one more component to be considered when defining the trade and that’s the acceptable capital exposure of any given trade.  This has to be established and followed. 

Knowing ahead of time the money that is needed for success and leaving room for draw-downs mentally help a trader to stay focused on a new trade verses focusing on the past. 

All of these parts contribute to a high probability trade and all translate into the mindset of a trader as certainty and confidence. Having this certainty and confidence allows for developing a solid trading skill set that leads to success. 

You know it call comes down to a plan and knowing you are in control of as much as you possibly can before the trade is executed that keeps the mind clear of confusion and doubt.  As soon as a trader goes into the H-W-P mode (that’s the hope, wish, pray mode) they are in trouble.  

When a trader trades from an offensive posture and exits if they are forced into be defensive one they will have a high probability of success when adding it to the defined trading set-ups. 

The more a trade can do before the trade the better. Remember each trade stands on its’ own and with a strong set-up criteria that is refined and tested the next trade can be taken in greater confidence. 

This topic has a direct affect on a trader’s emotional state. Creating as much “certainty” as possible will influence your trading successes. 

Till next time great trading!