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Follow these 7 tips to look for high probability trade setups

High probability setups are about confluence, controlled risk

Perfect setups are impossible since the market is a moving target. On the other hand, high probability setups are frequent and can be found. It is a confluence of factors can come together to one a trader very strong ideas in conjunction with a small risk.

In my opinion, this setup in the Hang Seng Index qualifies for high probability and should be bookmarked and taken out to look at often.

Triple top provided pullback level to short

Hourly chart; note the neckline

This hourly chart shows:

  1. A triple top chart pattern that immediately hints bearish reversal
  2. Neckline is a horizontal line that is well tested i.e. plenty of precedents
  3. As a standalone, a pullback to neckline offers a low risk entry

 

Double top at daily chart with low risk

Daily chart; neckline remains the same but the chart pattern looks different

This daily chart shows:

  1. A double top pattern with the same neckline
  2. Even with a daily candle as trigger, risk can be quantified ‘at most I will lose the whole candle’ but downside offers an attractive potential of multiple times

 

hang-seng-index-bull-trap-4-year-high

On the monthly chart, the same neckline reveals its signficance

This monthly chart shows:

  1. As a final glue that should stick a short trade together, the neckline turns out to be a significant level at 4-year high and psychological level 
  2. The confluence of factors should give one a sense of confidence and conviction to do the trade

 

These 7 tips lead you to high probability trade setups

Traders can observe some of the following as a guide to find high probability trades:

  1. Look for reversal chart patterns at key support resistance levels (which are best turning points)
  2. Chart pattens should be easily identified (if you are not sure, that means the pattern is not good enough)
  3. The bigger the time frame, the more significant the picture
  4. The more times a level has been tested, the stronger it is
  5. Look find potential big moves, look for big patterns
  6. Good trade signals involve multiple elements
  7. Presents a low-risk high-reward profile where the risk of trade can be easily quantified

This Hang Seng Index is not a big reversal pattern since the double top on the daily chart developed over 6 days. Big patterns can take time plenty of time to develop. A good bearish reversal pattern can sometimes take months to develop but some bullish reversal patterns like a round bottom can even take years.

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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