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The highest probability setup I know
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The highest probability setup I know

by ScottJanuary 22, 2011

What makes a good setup is an interesting topic. IMO it doesnt come down to this pattern or that setup, it is a function of how price is behaving, viewed as a totality.

When price starts to break down or up, BIAS steps in to make us naturally consider prices compared to where they were, and we think about waiting for a pullback before getting long (or vice versa for short)

The thing is, statistically most of the really big moves come from already overbought or oversold conditions.

The setup is

1) Price is embedded in the lower bollinger band (for sells)

2) Either an INSIDE PERIOD, OR A SHOOTING STAR

Setup complete. Sell 1 tick below the low, stop 1 tick above the high.

Look at the Euro price action from Dec 09 – June 10. 12 trades, 11 winners (and the only loss wasnt a complete loss)

This is typical of overextended moves. I can show you EXAMPLE AFTER EXAMPLE of times when setups in one direction get UBER reliable. Like long setups in $spx for the last 2 months.

Now look at Silver. Tell me if it looks too late to get on board. ANY inside day, or shooting star candle is a >85% probability as long as price remains embedded in that lower bollinger.


About The Author
Scott

  • http://twitter.com/Tahoe58 Peter Jalkotzy

    very cool layout and presentation. thanks!

  • volar

    “When price starts to break down or up, BIAS steps in to make us naturally consider prices compared to where they were, and we think about waiting for a pullback before getting long (or vice versa for short)”

    Thats it. No really that is it.

    The HARDEST trades to make are the BEST trades to make…

    Silver is breaking down, and until the price action dictates otherwise we are now in a bear market. So like Livermore said, “I sold it, it went down, so I sold more. It went down again, so I plunged short.”

  • BobbyLow

    “Bobby, You arent in any danger of blowing up anymore 🙂 IMO you could benefit from some of what I mentoned above, looking at the same stocks in the same order at the same time every day.”

    I hope you're right on the Blowing Up Part. LOL

    On the topic of looking at the same stocks at the same time everyday, I currently have 14 Sector SPDR's (which I plan to eventually bring down to 10) that at 4PM every trading day I put each one on my daily chart and qualify whether they currently should be Long, Short or Neutral. These stats are put into a Hand Written Note Book.

    Over recent days, mostly everything Qualified as Long. The exceptions are XRT which I am Short, XLB which I stopped myself out on Friday and might jump back into Monday, and XME which just became an “Official Short” at the close on Friday. Now XME is interesting because it is comprised of mostly Miners Gold, Silver, Copper and Coal among others. (It is also imbedded in the Lower BB) I'll be adding SLV to back to my watch list as this thing could go back to the teens again and time will tell if that's going to happen.

    “When price starts to break down or up, BIAS steps in to make us naturally consider prices compared to where they were, and we think about waiting for a pullback before getting long (or vice versa for short)

    The thing is, statistically most of the really big moves come from already overbought or oversold conditions.”

    Ain't that the truth! 🙂

  • convictscott

    That GBP setup you posted in the previous comments is *very* interesting 🙂

  • volar

    GBPJPY looks especially interesting from the long side 🙂

  • convictscott

    I think you should do a rough pencil and paper backtest of accuracy of your setups from already overbought or oversold conditions. I suspect that what you will find is that they go from mid sixties percent to mid 80's

  • BobbyLow

    Will do and I think you're right.

  • convictscott

    The corollary to that observation is that if you can identify a situation where setups are reliable, its appropriate in that situation to increase R size, probably from 2.5% to 5%

  • convictscott

    I'm sitting here developing my trade plan before open on Monday morning (for me, for you guys the work week begins on Sunday)

    Im suspecting that the AUD short and ES H1 short are going to be almost perfectly correlated. I think I'll take the trade in the non-manipulated market.

  • convictscott

    I personally fucked myself by getting dissolusioned with the equities market and refusing to take the last 2 long signals which would have been winners for me. Bias is insidious and must be constantly guarded against.

  • Turps

    Finally the lightbulb comes on in my head…..”let the trend be your friend”……Doh!

  • convictscott

    Read the chapter in this by William Echkardt , its some of the best trading advice ever

    http://www.masterkillers.com/w

  • Turps

    Thanks Scott

  • amokta

    CS do you think that gold could reach $2000 (say) by the year end? i only ask this to guage what importance you give to 'news'/big picture analyses, and whether one can trade (or invest) on big-picture/longer-term timeframe

    I suspect what you (and Mole) would say is not to waste time pondering the macro/longterm (as its difficult to make accurate predictions, and perhaps even harder to trade them in terms of timing unknown even if right)

  • volar

    CONCUR!

  • volar

    touche… touche…

  • convictscott

    I think that markets are a positive feedback loop. A little upmove causes shorts to capitulate, causes prices to go up, causes fresh bulls to buy, etc, etc.

    Its a chaotic system. The further out from today you are, the harder things are to predict.

    Its very bad trading practise to even devote thinking time to such nonsense

  • convictscott

    Classic Stuff! I reread this every time I get frustrated with markets, every lesson there ever was is right there 🙂

  • http://practicalt.blogspot.com/ Gold_Gerb

    (GG rolls his eyes.)
    “buy low sell high.”
    what is low?
    what is high?
    and yes, what is the length of trend you describe? eh?
    5m, 60m, daily, weekly, monthly?
    yeah. I'm loving it.
    (rant off)

  • https://evilspeculator.com molecool

    “This is typical of overextended moves. I can show you EXAMPLE AFTER EXAMPLE of times when setups in one direction get UBER reliable.”

    Basically that is the definition of trend trading. Most people learn to buy low and sell high. Trend traders buy high and sell low.

    I know that will take time to sink in a little – here is some help:

    http://www.buzzle.com/articles

    Incidentally that is exactly the opposite of what Fortune magazine will tell you 😉

    http://finance.fortune.cnn.com…/

    That author is making a specious argument. Retail traders often buy the top of the market – that's not what trend traders do. Rather they let price prove to them that new momentum (as in trend) has established itself.

    Anyway, it's a big subject and I have plenty on the subject but Scott is on a roll and I will give him time to present his POV first.

  • https://evilspeculator.com molecool

    See my comment just now – that should address your confusion.

  • http://practicalt.blogspot.com/ Gold_Gerb

    i've listened to plenty of turtle audio quips.
    http://www.turtletrader.com/
    Trend traders buy high and sell higher & vice verse.
    When it works, they get freaking rich. But following the rules seems to be the ultimate challenge.

    QE or not. The transition of 2010 markets from cycling, to trending – was a killer for myself.
    Time to restudy it.

    http://www.youtube.com/watch?v

  • SW6

    This is great subject matter-thanks.

  • SW6

    …so, if shorting one should short not from (subjectively perceived) “tops” but rather from breaks of support.
    Conversely, if buying, one should do so, not from “support” (the subjectively perceived bottom), but rather from a break of resistance. Is that it?

  • https://evilspeculator.com molecool

    Since Scott talks about 'embedded' – interesting choice of words. I often use 'embedded stochastics' to ride a trend. Which means that the stochastic line drops below 20 or rises above 80. Many traders wait for a drop through the 80 and rise through the 20 to get in. I however often sit things out and the drop through the 80 and rise through the 20 are my exit signal. Why? The signal often gets embedded during short/long squeezes – works especially well with currencies and commodities, and in the past year (thanks to The Bernank) also with equities.

  • convictscott

    You raise an interesting point about how trend traders (the most consistently profitable group of traders over the last 30 years until HFT came along) do the opposite of what retail traders do, even though superficially its the same.

    Its emotionally very difficult to buy the high/sell the low in a trend trading fashion, which is why the best trend traders use almost entirely mechanical process, and put all their creativity and intuition into designing their rulesets. I dont know ANY discretionary trend traders, darwinian natural selection has killed them all, while their mechanical brethren have prospered.

    This is the exact opposite of the emotional makeup of the retail trader, who finds it easiest to buy the all time high, and sell the all time low. I'm not the only person I know who got calls from non-trading friends asking about silver recently.

    In Australia we had a full-on property bubble which is nearing its retest of the highs. The all time peak was in 2007 and I dont know ANYONE who sold property at the top of the market. Personally I even bought more, 1 year before the peak. It was surprisingly easy to sell that property for a loss when I got out of jail. I even comforted myself with the fact that everyone had suffered the same loss (classic loser thinking). Emotionally the easiest thing is to buy high and sell low.

    Its a function of our DNA, we evolved to be part of a pack, herd animal behaviour is ingrained in us. Successful trading/investing mindset involves some method of freeing ourselves from the chains of our DNA.

  • convictscott

    I just had a quick look, and embedded stochastics line up pretty closely with the bollinger band stuff 🙂 Probably more scientific too

  • convictscott

    I have a different money management method I stole from the trend trading world for short squeezes. I'll put together a post on it.

  • convictscott

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  • https://evilspeculator.com molecool

    Heck, whatever works for you, mate…