How to find High Probability trades? Hi all, hope you guys are doing well. It’s been a long time since I last posted. Apologies for that. 🙏
In this post, we are going to see how we can combine different indicators/concepts to create confluence zones and find high-probability trades.
Introduction
A trade that has a greater chance of success than a regular trade is called a high-probability trade. Obviously, it's our assumption that some trades have higher chances of success as compared to others because they have more supporting factors. Nevertheless, a high probability trade can also result in a loss.
How to find high-probability trades?
There are a few things that you can observe to find a confluence of various important factors such as a support/resistance level, demand/supply zone, Fibonacci level, moving averages, volume, RSI, etc.
Depending on your knowledge and trading style, the confluence zone can be derived using a combination of various different concepts or indicators. In this post, I am going to share the factors that I look at for finding good trades.
How to find confluence zones?
In order to find the confluence zones, you need to understand the concepts and the indicators, then combine them together to create the whole picture. It's like building a jigsaw puzzle - first, you need to identify the individual pieces, and then you need to put them together.
Let’s dive into all of these concepts one by one.
1. Market structure
Market structure is simply a basic form of understanding how the markets move . The price action is how the market moves based just on price, without the consideration of trends and how they may continue. But the market structure is focused mainly on the trend.
I have covered market structure in various different threads that you can read here:
2. Consolidation before Breakout
If a stock consolidates before giving a breakout, there are higher chances that it will be a true breakout. This is because all the residual supply gets absorbed at the resistance zone and most of the pending demand orders get filled.
Ideally, once a stock goes into consolidation, one of the two processes occurs:
Accumulation
Distribution
In layman’s terms,
- If demand is more aggressive than supply, then the price rallies, which confirms accumulation.
- Similarly, if the supply is more aggressive than the demand, then the price falls down, which confirms distribution.
If you are struggling with identifying the breakouts, be sure to read this post.
3. Support-Resistance levels
S/R levels are critical parts of trend analysis because they are used to highlight important zones. The fact that these levels flip roles between support and resistance can be used to determine the range of a market, trade reversals, bounces, or breakouts. These levels exist due to the influx of buyers and sellers at key junctures.
Flip zone acting as resistance:
Flip zone acting as support:
If you are looking for an in-depth tutorial on support and resistance, please check out my old guide here:
4. Supply-Demand zones
S/D demand zones are one of the most important things that I look at while charting. The stronger the S/D zone, the higher the chances of a reaction. Always look for these zones in the direction of the major trend.
5. Location of 200MA or 200EMA
Always observe the position of 200MA/EMA with respect to price. Once the price interacts with the moving average, study the reaction. If you are looking for a long trade, then look for a positive reaction as the price reacts with the moving average.
6. Overlap with a Fibonacci level
A lot of times, the price will come back to a Fibonacci level. You need to observe the price behaviour near these levels.
If you are not familiar with the Fibonacci tool, please check my old guide on Fibonacci retracement and extension.
7. Candlestick pattern and the size of the candles
The candle spread plays an important role in determining the strength and mood of the underlying trend. In layman's terms, big-bodied candles indicate strength and small-bodied candles act as noise.
In any case, the candlestick pattern and candle spread should only be viewed at an important level. The context plays a crucial role.
8. Chart patterns
This is pretty self-explanatory. If you trade patterns, you can combine them with other factors to strengthen your analysis.
9. Volume expansion
Ideally, at the time of the breakout, the volumes should rise . The volume can be deceiving and we need to see orderflow for a clear picture. Obviously, the majority of us are not looking at the orderflow and hence the volumes can be deceiving. But, for a normal trader, the simple volume indicator is more than enough.
So, these are mainly all of the factors that I look at while analyzing the charts. Please note that the usage of the concepts will vary with charts. Sometimes only 3-4 factors may be at play and the other times, 6-7.
High Probability trade checklist:
1. Market structure
2. Consolidation before the Breakout
3. Support-Resistance levels
4. Supply-Demand zones
5. Location of 200MA or 200EMA
6. Overlap with a Fibonacci level
7. Candlestick pattern and the size of candles
8. Chart pattern
9. Volume expansion
In the example above, you can notice the following things:
1. The market structure was bullish before the breakout, which was evident from the formation of higher highs and higher lows. Don't confuse the internal structure (Low time frame structure) with the external structure (High time frame structure).
2. The price was consolidating in the rectangle/parallel channel for a good amount of time.
3. When the price reached the previous demand zone, the selling pressure started to decrease and the buyers started to step in.
4. When the price interacted with 200MA/EMA, there was a strong reaction to the upside. This means that the buyers want to take the price higher.
6. The buying interest can be seen by an increase in the volume in the last few sessions before the breakout. The volume can be deceiving and we need to see orderflow for a clear picture. But in general, you do not need to complicate this, just use volumes in conjunction with other factors.
7. We always look for some reversal or indecision candlesticks in the confluence zone. In the chart above, at the point of interaction with the moving average and the demand zone, we can see the formation of exhaustion candles.
Again, we need to look at these patterns only at specific important levels (like support or resistance levels) and disregard the formations in between the levels.
8. When the price broke above the previous major resistance with a massive bullish candle, there was a heavy volume expansion.
More examples:
You can read and revise this post until you understand all the concepts.
Thanks for reading. I hope you found this helpful! 😊
Disclaimer : This is NOT investment advice. This post is meant for learning purposes only. Invest your capital at your own risk.
Happy learning. Cheers!
Rajat Kumar Singh (@johntradingwick)
Community Manager (India), TradingView
Tradingsystem
Gap up / gap down intraday strategy with simple entry / exitI get queries from a lot of people who don't want to study technical analysis much.
They're just focused on getting a predefined trading strategy, which they can use effectively in the market without looking much at the charts .
So, in this video, I share a strategy which has been given really good results and it works a lot of times and I believe the probability of this particular strategy is close to around 65 to 70%.
It has simple entry and exit rules, and you can only apply this particular strategy when the market opens gap up or gap down.
See, whenever the market opens gap up or gap down, there is high volatile period of the market during the beginning half an hour or an hour.
And in that period of time,if you place a trade, then you have a good probability if market moves as per expectation.
As you can see these days, nifty and back nifty have been creating gap up and gap down opening almost on a daily basis.
In this case, the first rule is that if the market opens gap up by more than half a percent.
So for example, if bank nifty opens gap up by more then 200 points. , then only you can apply this strategy.
And on the other hand, if nifty opens gap up or gap down by more than 50 or 60 points, then only you should think of applying this particular strategy.
Small gaps do not count in this strategy.
So if bank nifty gaps down or gaps up by only 50- 60 points, then avoid this strategy altogether.
See, whenever the market is opening gap up or gap down, there are two possibilities.
The market might continue the current trend.
For example, if the market opens gap up, the chances are that the market might move higher, or the other possibility is that the market might go sideways the whole day.
So ,in this case, whenever you see the market opening gap up or gap down by more than half a percent, just have to follow this simple procedure.
Just plot the 15 minute chart with a 20 exponential moving average.
Why 20 exponential moving average because the market usually gets good support and resistance around the 20 moving average.
You can expect the market to stall around the moving average for a lot of times if you take a trade.
So ,you just have to plot the 15 minute chart, and if the market gaps up or gaps down, you just have to watch the first 15 minute candle.
So if the market opens gap up and it forms a bullish candle.
Then , what you can do is you can sell puts if price breaks the first 15M candle high. You can sell puts with the stop loss at the low of the candle.
If the market comes below the low of the candlestick the first 15 minute bar, then you exit your position and book the loss.
Why sell puts?
The idea behind selling puts is that during the first 15-30 minutes, the volatility is on a very higher side during that period.
And if at that point of time you start to sell options, then with the passage of time, as the market starts to move sideways, the volatility reduces.
And, what occurs is a concept called IV Crush.
The volatility starts to reduce very quickly and that will give you a benefit if you sell a put, even if the market goes sideways.
So for example, the market formed a very big bullish candle, and the criteria is if it crosses the high of the candle ,sell puts .
So, the whole day, if the market is moving sideways/upwards , the volatility crush will start to happen.
And with the passage of time, you'll start to see the benefit of the IV Crush and the time decay.
So this is a very handy strategy which you can apply.
Always remember, keep the stop loss below of the first 15M candle.
It's a very effective technique, and it's based upon gap openings.
And ,the first 15 minutes usually tell us who is on the stronger side, who's winning , buyers or sellers.
So make sure the gap is big and whatever bar is being formed in the first 15 minutes.
If the bar is bullish, you sell a put If the price crosses the high of that candle stick, and stop plus below the low of that candlestick.
It's an effective rule based strategy and you can back test it on nifty and bank nifty.
And you can also check its reliability, its effectiveness, you can also add this particular strategy in your tool kit.
So I hope this strategy will provide some sort of value to you in your trading.
And if you find the video helpful, don't forget to like this and share it and also comment your thoughts.
Thank you very much and take care.
Would You Stake Yourself?Hey everyone! 👋
Last week, we took a look at a hypothetical scenario, where a rich acquaintance of yours needed help deciding between two traders he's thinking about staking. This led to the question: "Who would you stake?".
This post will continue right where that one left off.
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After getting the contact info, you reach out to interview the two traders.
You speak with Trader #1 , and he appears to be quite intelligent, with wide and deep market knowledge. He’s shown you a few market predictions that he’s already gotten correct, and walks you through how he finds opportunities. You’re impressed.
You speak with Trader #2 , and he also appears to be quite intelligent, with broad market knowledge, in addition to a history of profitable investment/trade ideas. He walks you through how he finds opportunities, and, similar to Trader #1, you’re quite impressed. In addition, he also presents you with written details about how he plans to manage risk, his maximum drawdown, and a whole litany of other clearly defined rules that keep risk under control and quality trade ideas coming.
Assuming we are still in the position of choosing which trader to stake, most, if not all, individuals in this situation would pick Trader #2 because of his attention to preparation and risk control, in addition to having a ‘business plan’. Trader #1 may be smart and highly capable, but he’s shown no evidence that he has a process to continually generate good trade ideas while ensuring that he doesn’t lose everything. Trader #2 has “done the work”, and proven that he’s worthy of the capital.
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Whether they know it or not, anyone who manages their own money is constantly faced with the same decision. If you step outside of yourself, are you more like trader #1 or #2? Is your trading plan worthy of investment? Would you invest in someone else who’s taken the same trades that you have? Does that person have a plan? Have they “done the work”?
Keeping yourself honest about what is working and what isn't is a superpower!
Hopefully, this emphasizes the importance of building a trading plan. Next week we will take a look at what factors are typically needed in order to build an effective one.
If you’re not like Trader #2, comment below about the steps you’re taking to become better prepared for what the market throws at you!
-Team TradingView
If you missed last week’s post, you can catch up here:
An Intraday trading system with a High winning rate using VWAP
Dear reader, this is a full-fledged trading system. If you follow all the mentioned steps correctly, you will definitely have a great winning ratio. You can back-test this system on any instrument, stock, commodity, forex, etc.
This system should only be used to take “Long” trades using the 5 min time frame on a stock that has sufficient liquidity.
Steps to follow:
1. Look for Bullish divergence – The first and foremost thing that you need to do is to look for the Bullish divergence. The bullish divergence must be either strong, medium, or hidden bullish divergence. Ignore the weak bullish divergence. If you don’t know about bullish divergence, you should read my thread on it.
Here’s the link:
2. Look for early signs of reversal, after the divergence has occurred – As soon as you spot divergence, look for different signs of reversal. These can include either some reversal, neutral candlestick patterns or a sharp curve in RSI along with the formation of some bullish candlestick.
3. Look for candlestick patterns – You should look for the candlesticks such as a hammer, bullish engulfing, inverted hammer, a railway track pattern, morning star pattern.
4. When to enter the trade? –You should wait for the price to close above the VWAP and there must be some sort of increase in volume which confirms the buying interest. When the price closes above the VWAP with a good volume, enter the trade. Until both of these conditions are met, do not enter the trade.
5. How to set stop loss? – The stop loss can be either the swing low or the low of the reversal candle. Also, you can either use a fixed stop loss or trail your stop loss to the succeeding swing lows.
6. How to choose the target? – The minimum target should be the previous swing high or the previous supply zone. You can keep trailing your position if the stock keeps giving multiple breakouts.
This system is highly effective and you can modify it according to your needs. You can read and revise this post until you master the concepts. I hope you find this post useful. Also, if anyone is interested in getting a PDF version of this thread, then you can message me, I'll provide it.
Disclaimer: This is NOT investment advice. This post is meant for learning purposes only. Invest your capital at your own risk.
Happy learning. Cheers!
@johntradingwick
-NSE (NCFM) Certified Technical Analyst
Trader... Cricketer & YOU: Part 2A batsman’s (trader’s) approach to his batting (trading plan) depends on
Whether he is playing:
- Test match (Long term investment)
- One day International ( Medium term)
- T20 match ( Short term / Leverage trade)
- Or for that matter a Rain hit T20 match ( Intra day High leverage high risk trade)
While playing a test match a batsman’s
- Focus is on avoiding temptations
- Keeping patience & willingness to leave a lot of deliveries
- Looks to hit when the ball is in his area of strength
- May score at slow pace but focus is on scoring big over period of time as he is aware & relaxed that time is on his side
While playing a T20 game
- looking to score at high strike rate but overall runs per match still restricted due to limitations of just 20 overs per match
- willing to take very high risks sometimes almost every delivery
- risks losing his wicket often
In ODIs
- tries to have a balanced approach
- looks to build his base & take calculated risk
- Unlike T20 match, batsman knows he has more time & hence can focus on planning, preparing and attacking at the opportune moment & revising his plan if there are deviations (after reading & getting a feel of the pitch, fall of wickets, targeting supposedly weaker bowler or last 10 overs, etc)
So what’s the similarity from trader’s perspective
Let’s see
A Test match trader / investor can
- Avoid the temptation of trading every trade
- Keep patience & should be willing to leave a lot opportunities he is unsure of
- trade when the price & trade set up is in his comfort level where he understands the risk & knows reward potential is far higher than risk involved
- focus on sustainable trades & stay in the market for a longer time
A T20 trader
- intraday / short term / leverage trader
- looks for higher leverage trade for higher reward potential on relatively less capital
- but overall profits per trade gets limited as leverage trades have a daily / weekly / monthly cut-off time
- hence many a times a high leverage trader cannot take full advantage of the complete potential movement in the stock
- often he also risks his capital (Wicket) as even a slight movement in the opposite direction can lead to Capital erosion
Medium term trader
- Looks to capture a decent opportunity & is willing to give the trade set up the time it deserves
- Uses trailing Stop loss to adjust as per markets movements
- Leverages only when he understands risk :: reward ratio and considers it to be favorable
- Does not risk by over-leveraging
Some food for thought…
I leave you with some numbers & stats, you decide what exactly you are looking for from trade…
- In T20 matches Virat hits a 6 every 24 deliveries on an average
- Compare this stat with his innings in the on-going IND vs SL test - scoring 243 runs in 287 deliveries but no sixes at all in such a big inning
- Although Virat’s ratio of scoring 6s in Test is very less
- he has an impressive 19 centuries in just 62 Test matches with a high score of 243
- compared to just 4 centuries in 226 T20 games with a high score of 113
- in the balanced format i.e ODIs, he has 32 centuries in 202 ODIs with a High Score of 183
Player is the same, ability is the same, capability is the same… but game format is different & players adjust to different format with different mentality and different strategies
If we analyse these numbers further, to score a big hundred, on an average, Virat requires
- just 3 matches in Tests,
- 6 matches in ODI format
- but requires a massive 56 matches in T20
So what are you looking for scoring 6s (taking higher risk) or scoring big over time (taking less risk)
Remember it is not about which format is good or bad, it is more about adjusting & blending yourself to fit in different time horizons and having realistic expectations with understanding of risk involved
Understand and be clear with your objectives before you enter a trade
Take care
To be cntd…
