High-Probability Trading
High-Probability Trading: The Definitive Guide to Trading Pullbacks and Breakouts
Here's the thing:
No matter how many entry techniques you learn, there are only two ways to enter a trade.
On callback. Breaking through. That's it.
But many of you are confused by this concept.
You may have this idea...
How do I know where the callback will end?
Breakouts tend to fail and I hate trading breakouts.
Should I wait for confirmation?
Don't worry.
Because in this article, I will teach you the essentials of trading pullbacks and breakouts.
How to identify callbacks
6 levels where the market may retrace (so you can “predict” market turning points)
How to Develop a Pullback Trading System
How to Find High Probability Pullback Trades
How to recognize a breakout
How to Spot Explosive Breakout Trading Before It Happens
How to Develop a Breakout Trading System
Find the Secret to Explosive Breakout Trading
are you ready?
So let’s get started …
What is a callback?
A pullback is when prices temporarily deviate from the underlying trend.
In an uptrend, a pullback is a decline.
Here is an example:
and…
In a downtrend, a pullback will mean a move higher.
one example:
According to the work of Adam Grimes, trading retracements have a statistical advantage in the market as shown below .
You may want to know:
What are the advantages and disadvantages of trading pullbacks?
Advantages of pullback trading:
When you buy into an area of value, you get a good place to trade. This gives you a better risk-reward ratio.
Disadvantages of trading callbacks:
If price doesn't move into your designated zone, you could miss a move.
be trading against the underlying momentum .
Now, this brings you to the next question.
Where does the callback end?
You cannot predict with 100% accuracy when a pullback will end.
But here are some guidelines:
1. Front resistance turns to support
2. Previous support level turns into resistance level
3. Towards dynamic support
4. Toward dynamic resistance
5. Towards Fibonacci retracements
6. Toward the trend line
Now:
You know where the price is likely to pull back.
This brings you to the next question…
Are you waiting for confirmation?
Confirmation is when the candle closes in your direction, confirming your initial trading preference.
This increases the likelihood of your trade.
one example…
However…
While waiting for confirmation, you get a lower risk-to-reward ratio. Because you enter the trade after the price moves in your favor.
sometimes…
It can cause you to miss big moves like this :
so…
Are you waiting for confirmation?
There are no right or wrong answers here, just what works best for you.
No matter which choice you make, you must know the possibilities and consequences that come with it.
Now, let’s apply this knowledge and discover a simple pullback trading strategy…
How to develop a pullback trading system to trade pullbacks?
Before developing your system, you need three things:
Your setting conditions
your entry
your exit
Disclaimer: The following is a random trading plan I created to illustrate my point of view.
If the 200 EMA is pointing higher and the price is above it, the trend is bullish (condition).
If the trend is bullish, wait for the price to pull back to the support area (condition).
If price pulls back into your support area, wait for a higher close (condition).
If the price closes higher, go long (enter) on the opening of the next candle.
If you are long, place your stop loss below the low of the candle and take profit (exit) at the high of the swing.
Vice versa for short settings.
By using the IF-THEN syntax, it makes your transactions more objective and leaves less room for discretion.
Now, this is not all there is to your pullback trading strategy:
Here comes the exciting part…
How do you find high probability pullback trades?
If you want to find high probability trades , you need to look at something called a confluence.
what is that?
Convergence is when two or more trading instruments come together to issue the same trading signal.
Example 1:
Example 2:
Or, read Moving Averages 101 by Steve Burns to learn how to incorporate moving averages into your trading system.
Here's what happens now:
More convergences:
Higher Probability Transactions
Transaction frequency is low
Less converging:
lower probability trades
Transaction frequency is higher
There is no point in just waiting for a high probability setup as you may end up making very few trades.
Likewise, you don't want to keep trading just because a single indicator gives a buy/sell signal. If you need more explanation, read Tradeciety’s How to Trade Like a Pro: Using a Mediocre Setup .
My suggestion is to blend 2 to 4 factors.
Some converging factors you can consider adjusting your pullback trading strategy:
trend
support and resistance
moving average
Multi-Year Highs/Lows
Oscillator Overbought/Oversold
candlestick pattern
Now:
You may realize that there are endless combinations you can come up with. To know if it can be consistently profitable , you have to test it for yourself.
If you want to learn more about high-probability trading strategies on pullbacks, watch the video below:
Moving on, let’s talk about breakthroughs…
What is a breakthrough?
A breakout is a situation where price exceeds established boundaries.
Boundaries can be defined using classic support and resistance .
Breakout to the upside:
Breakout to the downside:
You want to know:
What are the advantages and disadvantages of trading breakouts?
Advantages of Breakout Trading:
You'll always capture the action.
You are trading on underlying momentum.
Disadvantages of Breakout Trading:
When you pay a premium, you get a worse deal.
You may encounter a lot of false breakouts.
Although there is a possibility of a false breakout, this should not stop you from trading.
Why?
Because the best traders in the world love to trade breakouts.
When my buy stop is hit, I turn bullish and stay bullish until my sell stop is hit. It is illogical to be long without doing more. ——Ed Sekota
When I go bearish and sell a stock, each sale must be at a price lower than the previous sale. When I purchased, it was the opposite. I have to upsize my purchases. I don't buy long stocks when they're going down, I'm going to buy them when they're going up. ——Jesse Livermore
Now, this brings up the next question…
How do you identify a potential breakout before it happens?
In scope market...
1. Mark the highs and lows of the range
2. Watch if price trades outside the high/low of the range
Here is an example:
There’s another one…
Now, let’s move on to trending markets…
In an uptrend…
1. Identify swing highs
2. Pay attention to whether the price is above the swing high
one example:
In a downtrend…
1. Identify swing lows
2. Pay attention to whether the price is below the swing low
Here is an example:
Now that you know how to predict potential breakouts, this leads to the next question…
Are you waiting for confirmation?
For breakout trading, confirmation is when the candle closes above your established high/low.
one example:
But it comes at a price...
You may end up missing out on a big part of the move.
Here is an example:
so…
Are you waiting for confirmation?
It all depends on your trading personality. There are no hard and fast rules for this.
If you like the candle close, wait for confirmation.
If you prefer higher risk over reward, then you can trade without confirmation.
But remember, both have their pros and cons, which you have to accept.
confirm
It is psychologically easier to execute trades
Lower risk reward ratio
No confirmation
It is psychologically more difficult to execute trades
better risk reward
Now, let's apply this knowledge...
How to develop a breakout trading system?
Again, before developing your system, you need three things:
Your setting conditions
your entry
your exit
Disclaimer: The following is a random trading plan I created to illustrate my point of view.
If the price has been within a certain range for the past six months, place a buy stop order at the highest point (condition) of the range.
If the trade is triggered, set the stop loss at the previous candle's low (entry and exit).
If the price moves in your favor, then track your profits at the previous candle's low (exit).
Vice versa for short settings.
Now comes the best part…
Find the Secret to Explosive Breakout Trading
Markets tend to move in cycles.
From a volatile period to a trend period and vice versa.
The longer it stays in a range, the bigger the trend will be later on.
one example:
There’s another one…
so…
If you've noticed long-term price fluctuations, you're not alone.
Traders around the world will see the same charts as you.
Some people will line up to short resistance, and some will trade on a breakout.
If price does move above resistance, bears will be squeezed and breakout traders will jump on the bandwagon.
This is why prices persist for a period of time due to imbalanced buying/selling pressure.
If you want to learn more about high-probability trading strategies for breakouts, check out the video below:
frequently asked questions
#1: Where can I place my stop loss during breakout trading?
There are several ways to do this:
You can set your stop loss below the low of the advance (if you are trading the breakout of the advance).
You can also set your stop loss 3 to 5 ATR away from the entry price.
#2: How to track your stop loss on a breakout trade?
You can use Chandelier Stops to track stops, moving averages, and even market structures, etc.
If you want to discover more powerful trailing stop techniques, check this out.
#3: Is there a way to predict a breakout that is more likely to happen?
If the higher time frame is in an uptrend and price is now consolidating or forming higher lows at resistance, then the market may break higher (which would be consistent with the higher time frame trend).
This concept also applies to downtrends.
in conclusion
You just learned how to successfully trade pullbacks and breakouts.
Now it's time to put these techniques and high-probability trading strategies into practice.
Now this is what I want to know ...
How to trade pullbacks and breakouts?