High Probability Trading Strategies

I recently had a High Probability Trading Strategies book reader and DT Forex Report Subscriber inquire about stop loss placement on a potential trade setup we noted in a recent report. His question was regarding a potential trade setup in the report and the potential initial capital exposure. The initial stop loss would have been too far away from the entry to limit the initial capital exposure for his trade plan.

Firstly, our DT Daily Forex Report uses 60m data to identify intermediate term swing trade setups. We only make general trade strategies, not specific trade recommendations because the report is just issued once a day. Readers that apply the trade strategies taught in the book can usually identify setups with much lower initial capital exposure when the trade execution conditions are made.

But, the real lesson here is what if an ideal setup is made, but the objective entry and initial stop loss will result in more capital exposure than allowed by your trading plan as described in the book? Perhaps the lower time frame momentum did not make a reversal until the market had moved a considerable length away from where the stop is to be placed.

1. Pass up the trade. It has happened to me often that all the ideal conditions are in place for a reversal – price has made a direct hit on support or resistance, a corrective pattern is textbook, the reversal was made right in a time band for a low or high and the dual-time-frame momentum is perfect for the reversal – but the market has moved sharply away from the low/high and even entering on a one-bar-trailing entry puts the entry too far from the minor swing high or low for an acceptable capital exposure for the account size. The trade must be passed up, OR –

2. Trade a less leveraged vehicle so the initial capital exposure will be much less, OR –

3. Go to a shorter time frame for entry. This is not always possible, but often is. Let’s say the setup was made on daily-60m data with the 60m momentum reversal in the direction of the daily momentum. You might be able to go down to the 15m data for the execution. Remember, you are then essentially identifying a trade on 15m data in the direction of the 60m trend and momentum. But, if the daily momentum is also in the right direction, you will have three time frames of momentum in the same direction and the 15m setup and execution can turn into a longer term trade eventually managed with the daily data.

The most important principle is to not take a trade unless the setup conditions are in place, regardless of the time frame and never take the trade if the capital exposure is more than allowed for in your trading plan. Lot’s more about all of this in High Probability Trading Strategies. If you are interested in daily Forex (or futures or stock/ETF), check out the DT Daily Reports at www.DynamicTraders.com.