As the new year kicks off, you may have been thinking about getting started trading but where do you begin?
While hundreds of opportunities to make money present themselves daily, you need a strategy to find those winning trades.
With Pattern Profit Alerts, we focus on finding high-probability trade setups. Here’s a quick quide to how we go about it…
First, what defines a High-Probability Trade Setup?
To start, consider the market as completely random, meaning there’s a 50% chance of prices moving up or down at any given moment.
However, each confirmation or indicator increases the probability of a move in a specific direction.
A high-probability setup is one where at least three key confirmations align to suggest a trade. These confirmations could include:
• Fundamental analysis: Positive or stable economic indicators, company performance, or macroeconomic factors.
• Technical analysis: Support and resistance levels, trend lines, or candlestick patterns like bullish engulfing or double bottoms.
• Market sentiment: Increased buying or selling interest, often driven by news or economic events.
Of course, there’s never a 100% guarantee in trading. The goal is to stack the odds in your favour by combining these elements. You may also have more than one technical or fundamental factor that contributes to a high probability trade. The more the merrier!
How do these factors drive price movements?
Stock prices move based on the buying and selling actions of market participants. However, significant price swings are often triggered by key news events or fundamental data releases. For example:
• FED Reserve interest rate decisions.
• Economic indicators like non-farm payrolls (NFP) or the Consumer Price Index (CPI).
• Company-specific news, such as earnings reports or changes in management.
• Wars or trade tariff hikes (keep in mind with Trump’s inauguration this week)
These events influence investors’ perceptions of value, leading to high trading volumes and sharp price movements. Additionally, market sentiment and liquidity play crucial roles. A good example of this is the impact of Trump winning the election on the crypto market!
How to Identify High-Probability Trade Setups
Let’s use a recent Pattern Profit Alerts trade idea to see these three confirmations in action…
Now let’s break it down:
1. Confirmation 1: Fundamentals
From research, we know Naspers is fundamentally a strong company with a long-term growth outlook. This baseline expectation suggests the share price is likely to rise over time. Armed with this knowledge, we monitor the charts for “buy the dip” scenarios.
2. Confirmation 2: Reactionary Decline and Support Levels
After recent news linking Tencent to the Chinese military rattled the market, it caused a sharp 10% drop in Naspers share price. Despite the drop, we believed it was reactionary and didn’t reflect a fundamental change in the company’s value. This selling pressure pushed the price down to a long-term trendline support, an area with a higher likelihood of a bounce.
3. Confirmation 3: Technical Pattern
On the four-hour chart, we identified a double bottom pattern—a clear sign of price rejection at the trendline support. This provided the final confirmation, making it a high-probability trade setup.
It is important to note there are rules behind these technical setups. A chart pattern or candlestick pattern alone isn’t always enough to decide to take a trade.
What I mean is: if we are in a strong downtrend, and we form a double bottom, the probability is slightly in our favour, but if we wait for a double bottom pattern to form, after reaching an area of support, we have a much higher probability of making money!
Consistently identifying and executing these setups is what will make your trading profitable. Of course, identifying high probability set ups is just one aspect of being a successful trader, there are more, and equally important factors that lead to success, like risk management, trading discipline and managing your emotions! But we’ll explore these in another article.
If you’d like to learn more about trading, but are not yet ready to go it alone, why not follow along with us at Pattern Profit Alerts. You can sign up for 90 days 100% risk-free, set up your own demo account and paper trade the trade ideas we share and see how you do.
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