High probability trading means the likelihood of whether you trade will win or lose. It is important for all traders to look for trading setups that offer a higher probability of winning than losing.
Most novice traders do not consider high probability trading. So, they don’t ever enable themselves to get an edge over the market. Don’t be surprised because I am also among those traders who were cornered by the financial markets. I ignored the idea of the high probability of winning trades until I suffered lots of losses and learned lots of lessons. Eventually, it became clear that I needed trades with a higher winning probability than losing.
So, why is high probability trading so important? It is important because losing trades and losses are inevitable in trading. It doesn’t matter how good a trader is and how good trading setups are, one cannot keep losses out of the equation. As you know, financial markets behave in unexpected ways from time to time. Therefore, losses are inevitable regardless of the trading skills and strategies of a trader. Even the world’s most successful traders suffer setbacks and losses.
That said, it is important to learn about high probability trading. It is crucial to have trades with a higher winning probability. Therefore, we decided to help you understand the concept of high probability trading. Our definitive guide will help you learn all about high probability trading.
High probability trading explained
High probability can be defined in simplest words as something with higher chances than the other. So, high probability trading means the chances of whether a trade will be successful or not. Why is high probability trading crucial? Because traders need to have an edge over the market by focusing on trades that have higher chances of success.
You must be thinking that probabilities are just probabilities. They don’t guarantee success. So, why should we look for high probability trading rather than looking for 100% successful trading? It is a very good question. However, it is the financial market we are talking about. The world of trading has so many uncertainties and often behaves unexpectedly. There is no one in the world who can claim to be 100% successful. As we have mentioned a short while ago, even the most successful traders experience losses. They can make their strategies and set-ups that yield profit every time. So, what do they do? They focus on trades that offer higher chances of success.
Moreover, it is also good to think that probabilities are just probabilities. Even trades with higher chances of success may suffer setbacks. That is why it is important to use proper money and risk management. These techniques protect you against risking too much and losing your capital.
So, how high probability trading can help you? Let’s dive deep and find out.
High probability trading strategies
High probability trading means maximizing the odds of success in your favor. However, it isn’t a simple technique. It requires you to follow certain strategies and tactics that lead you to profitable trading.
Follow the trend
You find most successful traders advising novices to trade with the trend. Why do they emphasize trend following? Because following trends ensures the biggest profits for you. So, how to follow the trend? To follow a trend, you need to identify the trend. There are several techniques to identify a trend with perfection. For example, the most basic techniques are;
- Directional analysis – it involves simply looking at the chart to ascertain whether it is an uptrend or downtrend. So, it doesn’t involve any deep analysis.
- Higher highs and higher lows – it is another very simple technique to identify the market trend. In simple words, a trend is an uptrend if higher highs and higher lows appear on the chart. Conversely, a trend is a downtrend if lower highs and lower lows appear on the chart.
- Moving averages – Moving averages are among the most popular and widely used tools to identify market trends. You can also use moving averages such as 50 EMA to determine the market trend.
Now, you must be thinking about what should I do after identifying the trend in the market. How should I enter the trade? You are absolutely spot on. The next step is to enter a position and that is where areas of support and resistance play a vital role.
Support and resistance – the areas of significant importance
Once you determine the direction of a trend, the next step is to enter the trade. Areas of support and resistance give you the perfect opportunity to do it. You must keep in mind that these areas are keys for high probability trading. That’s why experienced traders, financial institutions, and everyone in between use them.
Firstly, let’s try to understand how to use support in high probability trading. Support is an area where buyers or bulls begin to exhibit their strength. So, the higher buying pressure begins to push prices high. You can use the area of support to go long as the buying pressure is eventually going to push prices high.
Secondly, the area of resistance is totally opposite to support. Bears or sellers exercise full control here as opposed to buyers. They resist with the full power to keep prices low. So, the higher selling pressure pushes prices down. You can go short as prices are going to decline.
How to enter a trade for high probability trading
There are 2 ways to enter a trade when looking for high probability trades.
A pullback means when prices go against the current trend in the market. For example, the price moves lower during an uptrend. Conversely, the price moves up against the trend during a downtrend in the market. Using pullbacks to enter a trade allows you to take your position at the best level. However, you may miss the trade if the price doesn’t drop to the level you predicted.
A breakout means when prices break the levels of support or resistance and go beyond those areas. For example, the price may pierce through the key resistance level and head high. Contrarily, the price may break the support and head low. However, it is important to enter a trade after confirmation. Otherwise, you may find yourself in the clutches of a false breakout.
How to manage risk in high probability trading?
After knowing how to enter a trade, it is time to think about managing risk. As we have discussed earlier, risk management is absolutely imperative even when you are trading with a higher win probability. So, how can you manage risk? You can manage risk by using stop-loss. Remember that set stop-loss at a level that indicates the trade is wrong. There is no need to set the stop-loss at a level determined by the maximum amount you can afford to lose.
To set a stop-loss, areas of support and resistance serve you again. As support is the area that doesn’t allow prices to easily go below, you can set a stop-loss just below that area. Contrarily, resistance is the area that doesn’t allow prices to easily go above, you can set a stop-loss just above that level.
Take small profits
As human beings, we always want to win all the time and earn profit. We also are never willing to take small profits. The emotions inside us impel us to go for more. However, it is the financial market we are talking about. It doesn’t care about what we think and want. It has its own way and we have to obey what the market is saying. Therefore, it is important for high probability trading to take small profits and do it frequently. You can take profit at a particular target and get out of the trade. The idea behind it is, you never know when the market will reverse and leave you empty-handed. Taking a small profit gives you the satisfaction that you at least have some share of the profit in your account.
High probability trading strategy
Now, we are going to share with you a very classic high probability trading strategy. It will help you maximize the odds of success in both uptrend and downtrend.
- Firstly, if you successfully identify a trend in the market and see if it is an uptrend. Remember, this is the first step in high probability trading – identify the trend.
- Secondly, you have to enter a trade now. So, you will wait for the price to pull back and come to the area of support.
- Thirdly, wait for the confirmation as you have to avoid false breakouts.
- Fourthly, initiate the trade after confirmation by entering on open of the next candle
- Fifthly, place a stop loss below the low of the candle
- Finally, set take profit to the nearest swing high as you need to take small profit for better trading
High probability trading is crucial for maximizing gains while minimizing losses. It means you need to play trades with higher chances of success. You can follow the trade setup we have defined here for you. It requires you to follow the trend, identify areas of support and resistance, enter the trade, set small profit targets, and set stop-loss.
However, high probability trading isn’t just about entering trades. It is also about your mindset. You have to be strong to resist your emotions. That is the only way to high probability trading and that is the only way to maximize the odds of profitable trading.