The Forex market is constantly offering lower and higher quality trade setups. It is our job as traders to scan, recognize, select, enter and exit the ones with the best odds and reward to risk.
The best way is via a strategy. A Forex strategy helps identify setups with a long-term edge because it allows traders to analyze the charts with a fixed process and rules. Traders can tackle the market either via a discretionary or non-discretionary system.
The discretionary method provides the advantage that traders can make a final judgment whether any one particular setup has a decent probability of succeeding. In that way, traders can choose higher quality setups and ignore lower quality setups within their strategy.
This article explains a simple tactic that helps Forex traders recognize the high probability trade setups with help from a few trading setups examples. You can also read about Trader Profile Quiz.
DECISION SPOTS AND TRIGGERS
New information is available on all currency pairs and all time frames every minute. The market is basically in a constant change and each moment offers the potential for a new setup.
Many of these moments, however, do not provide an edge to the trader. These setups do NOT offer a distinct advantage and have a low probability of success.
Setups with a high probability of success have a certain scarcity. The Forex trader must wait patiently for these setups to occur, like a tiger waiting for their prey, and then execute with discipline when the moment arrives.
But how does a trader recognize the moments of waiting and executing?
This is when introducing the concepts of decision spots and triggers are crucial!
WAITING FOR THE LINES IN THE SAND
Decision spots are important and key levels of the time frame of your choice. Identifying decision spots allows traders to ignore price action in the ‘middle of nowhere’ and wait for the price to reach the ‘lines in the sand’. This is critical because setups in the middle tend to be of lower probability and setups at key levels are of higher quality.
Using high probability forex trading strategies has enormous advantages for the trading psychology. First of all, it does not cost a trader any money. Most importantly, traders do not have to worry about missing a setup, chasing a setup, entering a setup too soon, etc. It is an enormous help for remaining patient and keeping the discipline needed to succeed in trading. Plus traders can avoid revenge trading by keeping a cool mindset. Taking too many doubtful trades can easily lead to overtrading which leads to a slippery slope where a trader wants to earn back their money quickly.
WAITING FOR THE ACTION OF THE TRIGGER
The trigger is the signal of interest a trader is waiting for. The trader has been patiently waiting for the price to move to one of their decision spots. And now the price has reached it… now what? How and when to trade? This is what the trigger solves. It basically is a call for taking action.
The trigger provides confirmation on how to trade at the decision level. It provides clues whether a trader will go long or short, or in other words whether they will take the break or bounce.
DECISION SPOT VS TRIGGER
Each Forex trader can choose their own indicators, tools, patterns, trends, and support and resistance for the roles of decision spot and trigger. There is no right or wrong method and you should pick something which you like to use and that matches your trading plan and psychology.
With that said, I will now present to you my own preferences for various decision spots and triggers and it is up to you if you use the same.
For decision spots, my number one tool is the strike trigger candle and trend lines. Runners-up are support and resistance, patterns, and moving averages.
For triggers, my number one tool is the candlestick and candlestick patterns. Runners-up are fractals and trend lines.
Here is an example: price is in an uptrend but far from support. After a while, price moves back to the support trend line. The trend line is the decision spot. Price can then show 2 different reactions via candlesticks. Hence the candlestick (pattern) is the trigger:
- A pinbar at the trend line à a bounce trade
- A breakout candle through the trend line à a breakout trade (requirement for avoiding a false breakout: a candle close to a close near the low and most of the candle through the candle)
- Confluence zones are actually the best decision spots available because it increases the probability of a trade setup succeeding. This happens because more support or resistance is available in that decision area, which makes the decision spot more valuable compared to decision spots with no confluence (see an example of confluence in the screenshot above).
- Wide open space is the potential movement price can make after reaching the confluence zone upon a break or bounce before hitting another decision spot. The more space the better as it allows the trader to have more options regarding exits.
Other sweet spots can be identified by using the concepts of impulse and correction. Price is always in either of the two and it depends on the strategy for which one is better for you.
For my own trading, I prefer catching the completion of a correction, the middle of an impulse and also the start of the impulse. I try to avoid trading the end of the impulse, start of the correction, and the middle of the correction.
Conclusion: I use the concepts of decision spots, triggers, confluence, and wide open space to judge the best and highest probability setups.
Do YOU use decision spots for your trading setups?
How do YOU set up triggers?
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