Finding the highest probability setups is one of the hardest tasks in trading. It is often a process of trial and error, and I struggled with it for years to find the setups that helped me to generate a profit consistently. This post should help you to safe time and adapt these strategies for yourself as fast as possible.

The highest probability trading setups are always in the direction of the overall trend of the security (stock, ETF, etc.) you trade and preferably in the direction of the market (S&P 500 / SPY). Let’s look into how you can recognize a trend and the trading setups as they form.

How to Recognize a Trend

Before I show you my highest probability setups, I want to show you how I recognize trends as this is essential for these setups.

People usually show trends as they kept going for a long time already, but I always asked myself how I could recognize a trend early on? I don’t want to throw my money in when the trend is already extremely overextended and screams for a more significant pullback. So after digging a bit deeper and watching thousands of charts, I came up with this simple rule to confirm to myself that there is a clear trend going on in that particular stock.

Setting up rules to identify a trend

Let’s take a look at how I recognize trends early. I set up some rules to identify a trend so that I know in which direction a stock is likely going to move. You can use these rules for up- and down-trends, and they also work on different timeframes that you want to trade. So my rules are as follows:

  • The price has been moving up several days with at least one higher low (or lower high if you want to trade a downtrend).
  • Price has a 20 EMA that is pointing upwards, at a two o’clock angle and steeper (or a 4 o’clock angle when you are going for a downtrend).
  • Price has broken resistance (or support zones in a downtrend) with substantial-high volume.

Let’s see these rules in action on a daily chart of ROKU Inc. (Ticker name ROKU). ROKU found a bottom while moving down as you can see with the 20-period exponential moving average (EMA) that is moving down and then making a turn to the upside. Before it moved up significantly on high volume, it built a higher low, which indicates that the stock wants to move higher.

20 EMA is pointing downwards, which indicates a down-trend.
After a higher low the stock moves up heavily with large volume.
20 EMA is pointing upwards, which indicates an up-trend.

As you can see the 20 EMA is now pointing upwards and the stock is building even a second higher low. I can say that this stock is on an uptrend, and I can look for setups to create my plan and find my entry.

When we look at the price continuation of this stock, we can see that the uptrend continued significantly.

The up-trend has been established and I can look for setups.
Volume indicates strength

When I see a high volume move, I will always look for a pullback because chances are, that it will move even higher. There is a caveat I need to add though. If you see heavy volume after a stock already moved up big, it could indicate that the price may have reached the top. You usually see this after a parabolic move up (or down in a down-trend).

Ideally, you want to see high volume pushes at support and resistance zones. The high volume increases the probability of the stock reversing and moving away from these zones and thus creating a new trend.

If you don’t know the best ways to find support and resistance zones, we show you the most relevant ways in our free trading guide here.

Setup 1: The Triangle Squeeze

Suitable for
DAY TRADINGSWING TRADING

One of the most common patterns you see in stock trading is ascending or descending triangles. The triangle is formed by a trendline that is moving towards horizontal support or resistance area. Many trading guides will tell you to buy the breakout over those resistance or support zones.

However, I recommend to buy at the trendline though and anticipate the move of the price before it happens. More often then not you will see fake breakouts over support or resistance areas where price comes right back down and reverses. Hence, the chance of losing money by buying breakouts is much higher than by trying to anticipate it.

Connect 2 low points to get a trendline.
Buy after it hits trendline again. Set your mental stop-loss below the most recent low.
sell 50% (or 75%) as soon as you get 1:1 risk/reward. For example if you risked 50 cents with your stop-loss you take some of it off after you got 50 cent. After that move your mental stop-loss to your entry price and let the rest ride up.

You can take the same concept and turn it around on the move down towards a support area with a descending triangle. If the stock had a big down move before the descending triangle, there is a high probability it will fall through the support zone.

Setup 2: VWAP Reversal

Suitable for
DAY TRADING

This strategy can be applied both ways. Either you wait for a pullback to VWAP (Volume Weighted Average Price) after a bullish upward move with a lot of volume, or you ready for a bearish downward movement. Watch out if VWAP kicks in as support or resistance. There is a high probability that the stock will get back to the high of the day or low of the day, depending on the direction you trade this strategy.

Heavy move down on a lot of volume not respecting the VWAP at all.
Short sell as soon as you see VWAP being respected as resistance.
Take 50% (or 75%) off and let the rest ride to low of day. Move the stop-loss to your entry price.

Setup 3: Gap With Wedge Reversal

Suitable for
DAY TRADING

A day trading strategy that you can use in the morning. You first search for a stock that is gapping up (opens higher or lower than the previous day close price).

Let’s say you see a stock that is gapping up 8% overnight. Usually, you can see an early morning sell-off because of shareholders that were in that stock from the previous day want to take profit, so there are more sellers than buyers. You wait and see if a wedge is being formed, meaning two trendlines that meet each other, even better when this happens into a well-known support zone.

Relevant here is that the stock does not sell off to the level it was on the previous day. Once you see the price breaking the upper trendline, you buy in and ride it to at least the highest pre-market price or high of the day to take your first profit. You will also see this happening to the short side when a stock is gapping down significantly.

Previous day price close price.
Buy when you see a higher low is being formed and the stock is breaking the upper trendline. Set the mental stop below the lowest wedge candle.
Sell 50% (or 75%) of your position at high of day and let the rest ride. Move your stop-loss to your entry price.

Setup 4: Flag Breakout

Suitable for
DAY TRADINGSWING TRADING

The flag breakout is a comprehensive trading strategy. After move up or downwards on a lot of volume, the stock consolidates with a flag pattern. You draw a trendline against the initial move and as soon as is broken you build up a position and take the first profit at the high of the initial move (or at the low of the initial move when playing to the short side).

Initial move on high volume.
Buy as soon as the downward trendline gets broken. set stop loss below the low of the last wave.
Take 50% (or 75%) off and let the rest ride. Move your stop-loss to your entry price.

Conclusion

All the shown high probability trading setups only work, if you analyze the trend of the stock. Always create a plan when you trade. Even though these setups have a high probability, there is still a chance they fail.

If you want to be a successful trader, consider checking out our free trading guide.

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