High Probability Setups

bearmountain · Dec 10, 2010

This is more so directed at discretionary traders, how do you differentiate between a High Probability Setup from one that is not? Can you please give examples.

As a mechanical trader, we take pride in taking 100% of the signals. In fact, it is deemed as a lack of discipline if we don't take a signal.

The following are some of the common comments I hear from discretionary traders, but I don't fully understand how they implement this in their trading:

"IMO you should really stick to the highest probability signals and not waste your time with the lower ones. They're just not worth it. "

"This is probably one of the most valuable lessons of years of trading. The patience to wait for a high probability setup."

ronblack · Dec 10, 2010

High probability > 0.7

Low probability < 0.7

The above assumes risk/reward <1

The problem then is one of calculating the probability of a setup. Usually, backtesting the setup conditions may provide a measure of the probability.

I find this a boring subject.

Redneck · Dec 11, 2010

BM,

I applaud your chipping away at the PA puzzle

Imho â when discretionary trading there are no âhigh probability" set ups.

They are all 50/50

Are there set ups that work more times than others â sureâ¦..

But if you allow yourself the luxury of that mindset (thinking high probability setups exist) â then the one you think is a "high probabilityâ set up will inevitably fail â and youâll be sitting in the position â losing money â while thinking it is a high probability set up

You want an example â a failed failure works more than it fails â but it still fails

Successful Journey Sir

RN

learner2007 · Dec 11, 2010

Learn, use and stick to the basics. Just the fact that they have survived the test of time proves that they're probability of success is high.

Quote from bearmountain:

This is more so directed at discretionary traders, how do you differentiate between a High Probability Setup from one that is not? Can you please give examples.

As a mechanical trader, we take pride in taking 100% of the signals. In fact, it is deemed as a lack of discipline if we don't take a signal.

The following are some of the common comments I hear from discretionary traders, but I don't fully understand how they implement this in their trading:

"IMO you should really stick to the highest probability signals and not waste your time with the lower ones. They're just not worth it. "

"This is probably one of the most valuable lessons of years of trading. The patience to wait for a high probability setup."

jjf · Dec 11, 2010

Quote from bearmountain:

This is more so directed at discretionary traders, how do you differentiate between a High Probability Setup from one that is not? Can you please give examples.
....................................................................................
"This is probably one of the most valuable lessons of years of trading. The patience to wait for a high probability setup."

Hello BearM,

I imagine that a discretionary Trader [a consistently profitable one]
would see the trading challenge in two parts.

One part would be the "setup" which would be relatively simple in sofar it would trigger an audible alarm when a set of conditions are meet.

Once the alarm is triggered, I imagine our D Trader would be called back to the screen and in one glance he can see whether the mood of the market is trade-able in the direction of the setup trigger, or not.

If not, he goes back to what he was doing and waits for the next alarm.

If he likes what he sees, he firstly establishes his covering stop and from this point he then establishes his entry zone and waits for price to fall into the trap, or not as the case may be.
In other words, establishing his risk is his first priority.

I imagine that our D Trader has devoted [wasted] vast chunks of time trying to code the market mood before finally acknowledging that the human mind can absorb and assess an ever changing situation at a glance and the amount of code required to replicate this task is simply enormous.

BearM, you probably want to give thought to the word "discretionary' and it's application in trading.

good luck

bearmountain · Dec 11, 2010

Thank you all for your replies. I have been looking at this thing(discretionary trading) for the past six months. One word that comes to mind is 'confluence'. As my friend Redneck and others point out, waiting for high probability setups is a slippery slope.

However there is some evidence that some traders are able to intuitively 'weigh' the odds, it is all very context related. Requires tons of screen time, experience and emotional control are esstential.

********
In geography, a confluence is the meeting of two or more bodies of water. It usually refers to the point where two streams flow together, merging into a single stream. It can be where a tributary joins a larger river, called the main stem, or where two streams meet to become the source of a river of a new name

macroman · Dec 11, 2010

best trades have technicals sentimet and fundamentals in their favour, even if we talk scalping.

trained human brain more precisely processes this info than one can program in computer.

Except of course if computer has insight in upcoming orders which i presume is the case with hft.

intradaybill · Dec 11, 2010

Quote from bearmountain:

... waiting for high probability setups is a slippery slope.

What do you think traders do when analyzing the markets? Answer: they are trying to estimate the probability of a given setup to make a profit and they like it to be as close to 1 as possible.

jjf · Dec 11, 2010

Quote from intradaybill:

What do you think traders do when analyzing the markets? Answer: they are trying to estimate the probability of a given setup to make a profit and they like it to be as close to 1 as possible.

Yes, that is exactly what is required and using words like"confluence" and "discretion" are both useless and misleading.

For example the Setup Alarm might be coded as .....

1 ... chart bar size =n
2 ... price falling for < z bars from HH ....
3 Price touches upper falling band H1

As you may have guessed, this is a part of the code for first pullback of a certain size from a prescribed High.

Left to it's own devises on the ES intraday it has about a 0.65 probability within a risk factor of x tics.

So yes it is tradable ... very tradeable in fact

And now we apply the macro glance .....

1 .... number of tics to rth open
2 .... point of balance ... where is it
3 .... number of hits on last HH [was it strong or weak]
4 .... previous HH
5 .... previous significant levels yes close, 2 day high, 3 day high etc etc
all these factors must be original data, not derivatives like pivot points, fib levels.

the trained eye can assimilate all this data within seconds and form an opinion [ aided by some data projecting onto the screen]

In the case of the setup described above the Trader decides that the "short" is good to go and baits the hook accordingly.

The probability of the setup now moves significantly closer to 1 and I mean SIGNIFICANTLY.

The risk is low because the trade is a fade and the entry is amongst the other guys stops if any.

Exiting the trade is similar and yet entirely different.
Buy trades have a very different profile to sell trades....etc etc

Try if you will, to imagine price is a piece of string.
Firstly, push on one end and watch how the string behaves ... that is congestion.
Then gently pull the end of the string ... that is trend.
Now watch this happen on the screen.

I noticed in an earlier post [now deleted] that Big Hog stated that NOT trading a setup was chicken shit behavior.
I wouldn't know about that, I only know that a Traders first and only loyalty is to his ratios.

% accuracy... ie trades win/lost
setups confirmed ... missed/ entry accepted
risk/reward % ... tics won/lost

These are but a few words on the subject of trading with big gaps between one thought and another.[intentionally]
I am just trying to paint a picture encompassing the magnificence of the human mind, so why waste it ... just set about training it as you would train any other muscle ... make it work for you and not against you.

All that is required BearM is an open inquiring INDEPENDENT mindset and the mental toughness to back it up.

good luck

johnw1 · Dec 11, 2010

Quote from jjf:

Yes, that is exactly what is required and using words like"confluence" and "discretion" are both useless and misleading.

For example the Setup Alarm might be coded as .....

1 ... chart bar size =n
2 ... price falling for < z bars from HH ....
3 Price touches upper falling band H1

As you may have guessed, this is a part of the code for first pullback of a certain size from a prescribed High.

Left to it's own devises on the ES intraday it has about a 0.65 probability within a risk factor of x tics.

So yes it is tradable ... very tradeable in fact

And now we apply the macro glance .....

1 .... number of tics to rth open
2 .... point of balance ... where is it
3 .... number of hits on last HH [was it strong or weak]
4 .... previous HH
5 .... previous significant levels yes close, 2 day high, 3 day high etc etc
all these factors must be original data, not derivatives like pivot points, fib levels.

the trained eye can assimilate all this data within seconds and form an opinion [ aided by some data projecting onto the screen]

In the case of the setup described above the Trader decides that the "short" is good to go and baits the hook accordingly.

The probability of the setup now moves significantly closer to 1 and I mean SIGNIFICANTLY.

The risk is low because the trade is a fade and the entry is amongst the other guys stops if any.

Exiting the trade is similar and yet entirely different.
Buy trades have a very different profile to sell trades....etc etc

Try if you will, to imagine price is a piece of string.
Firstly, push on one end and watch how the string behaves ... that is congestion.
Then gently pull the end of the string ... that is trend.
Now watch this happen on the screen.

I noticed in an earlier post [now deleted] that Big Hog stated that NOT trading a setup was chicken shit behavior.
I wouldn't know about that, I only know that a Traders first and only loyalty is to his ratios.

% accuracy... ie trades win/lost
setups confirmed ... missed/ entry accepted
risk/reward % ... tics won/lost

These are but a few words on the subject of trading with big gaps between one thought and another.[intentionally]
I am just trying to paint a picture encompassing the magnificence of the human mind, so why waste it ... just set about training it as you would train any other muscle ... make it work for you and not against you.

All that is required BearM is an open inquiring INDEPENDENT mindset and the mental toughness to back it up.

good luck

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