Learning how to find great trades is not as difficult as many might think, however acquiring the discipline to adhere to those trades “only”, can be a daunting task. In this article I will lay out a few "tips" that may help you locate high probability trading setups. I will also discuss some "tips" for sticking to the great trading opportunities you’ve learned how to find.
Finding Great Trade Setups – Tips
Use Multiple Time Frames
Why? When finding a trade, it may look great on a single time frame. However, when this same location is viewed on another time frame it may appear very weak and not high probability. This means that you may not have any other time frame traders willing to take the same side of the trade as yourself. In order to find the best trades, we need the most orders on the same side (bid or ask). If traders looking at different time frames, see the same great setup or one of equal opportunity which coincides with your direction, the order flow is combined and therefore increases the probability that price will go in favor. “The More the Merrier”!
Trade with the Larger Time Frame Direction
More money is required to trade larger time frames due to the increase in the size of risk. As we all know, price moves in the direction controlled by the imbalance of money. If the larger money is on the bid side, price will move higher. Conversely, if there is more money on the ask side price will move lower. The continuation of price direction is derived from the lack of substantial liquidity required to generate a turning point or “reversal”. Even a small move on a large time frame would equate to a fairly large move on the small time frame allowing you to take partial profits with the potential to capitalize on the remainder of the larger move. By doing this you are able to decrease risk and increase profit potential.
Don’t Trade Against Larger Time Frame Levels
When the larger time frame trend is nearing an end it is often reversed due to a previous level of opposing order flow. These levels are like footprints that have been left and offer professional traders a way to track institutional movements. While they may be from some time ago or more recent, it is a great time to create needed volatility to entice willing participants. As statistics have shown, most often price will at minimum provide a “pullback” from these levels in the opposing direction of the current trend. To increase probability, it is best to allow this to occur before executing a trend following trade.
Use Levels to Find Great Trade Entries
Just like reversal levels, there are also continuation levels which help price to build momentum in the same direction. The most common occurrence in the financial markets is for price to return to supply and demand or support and resistance levels. Many of the best trades will take place at these levels. Depending on the type of trader you are (or want to be), the entries may be executed based on the level alone or combined with a confirmation such as candlestick patterns.
Sticking to Your “Great Trade” Plan - Tips
Set and Forget the Orders
This is a scary thought for many, however it has proven to be a great way to reduce emotional trading and even increase success. The more we sit in front of a computer screen and analyze price, there is more of a chance that we will over analyze and cause just as much or more damage to our trade as under analyzing. Be secure in your thought process and feel confident from the start.
Let Price Reach Its Final Target
Too often we allow emotions to cloud our judgement and cause the removal of a trade too early giving up well deserved profits. Giving price room to run is a good approach because of market volatility, which means that price will bounce up and down but eventually resume an overall direction.
Use a Trailing Stop Until Final Target
Once partial profit taking has been accomplished, there is no reason to give back any of the gains. Furthermore, there is a great reason to lock in some additional gains. As there is never a guarantee that price will reach the final target, using a “realistic” trail stop will ensure that you maintain the best return.