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Trade “Middle Waves” For a High Probability of Success
A common trading problem is that if you wait too long to enter a trade–until everything looks perfect–the trend is likely almost over. Yet, if you try to anticipate changes in direction you’ll likely be too early and thus sustain losses before the market turns in your favor. If Goldilocks were a trader, she wouldn’t want to enter too early or too late, she’d want a trade right in the middle. That’s where the bulk of the money is, and where new traders should place most of their focus.
Finding the Middle
In trading circles, the middle of the trend is often referred as “the 3rd wave,” related to the Elliott Wave Theory assertion that trends typically unfound in 5 wave patterns, and then correct in 3 wave patterns as shown in figure 1.
Figure 1. Basic Elliott Wave Structure
Trading middle waves doesn’t require any Elliott Wave knowledge, because by looking for a certain pattern most trades will end up taking place during “wave 3,” or even if we don’t realize we are in a pullback and not a trend, worst case scenario we are trading in “wave c.” In either case, the setup aligns in the right direction to profit from wave 3 or wave C.
To find the middle of an uptrend, you need a higher high and a higher low.
To find the middle of a downtrend, you need a lower low and a lower high.
Figure 2 shows the start of an uptrend. The AUD/USD had been moving lower, making lower lows and lower highs. Then, on a strong rally it makes a higher high followed by a higher low. This provides a high probability that the trend has shifted–at least temporarily.
Figure 2. AUD/USD Shift in Trend – Daily Chart
In this case, after the higher high, we need to wait for a pullback. As long as the pullback stays above the prior low we are looking for a long trade, because we now have a higherhigh and higherlow, which means either a wave 3 (preferably) or wave c is about to unfold and we want to be a part of it.
Figure 3. Setup
Figure 3 shows the basic setup. Based on the higherhigher, we want to go long, but need to wait for a pullback to do so. We let the pullback materialize, but as soon as the price starts moving higher again we take a long position. Figure 3 shows an entry point where a very strong up bar moves above the highs of prior pullbackbars, indicating the buying is resuming.

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A stop loss is placed just below the most recent low on the current pullback (or above the recent high on the current pullback if looking to go short in a downtrend).
At the very far right of the chart the price reversed again, therefore this “trend” only lasted 3 waves and not 5. By trading this strategy though it doesn’t matter; since markets almost always move in at least 3 waves, often more, by getting in just as the third wave (or wave c) is starting the trade has a high likelihood of at least moving somewhat in our direction before reversing.
With binary options your profit is already set, but for those trading traditional markets, a Fibonacci Extension tool can be used.
If the pullback is relatively shallow compared to the prior wave, as it is in Figure 4, exit at the 61.8% extension. If the pullback is quite deep (retraces more of the prior wave) then use the 100% extension level. As a general rule, use the first extension level which is above the prior high in an uptrend, as shown in Figure 4 (or below the prior low in a downtrend). The rectangle at the 61.8 level indicates the exit.
Figure 4. Target
This strategy takes advantage of what appears to be the middle of a trend. There is no way to know for sure when the trade is taken that it will work out. The market does produce repeating patterns though (even though they may look slightly different each time), therefore many traders seek out these middle or 3rd waves because of their “trustworthiness.” A strategy that covers how to enter the trend sooner is covered in The High Probability SnapBack Strategy.
Using Standard Deviation & Probability to Trade Options
I recently discussed the ability to use implied volatility to calculate the probability of a successful outcome for any given option trade. To review briefly, the essential concepts a trader must understand in order to make use of this helpful metric include:
 The prices of any given underlying can be considered to be distributed in a Gaussian distribution the classic bell shaped curve.
 The width of the spread of these prices is reflected in the standard deviation of the individual underlying’s distribution curve.
 Plus / minus one standard deviation from the mean will include 68% of the individual price points, two standard deviations will include 95%, and three standard deviations will include 99.7%
 A specific numerical value for the annual standard deviation can be calculated using the implied volatility of the options using the formula: underlying price X implied volatility
 This standard deviation can be adjusted for the specific time period under consideration by multiplying the value derived above by the square root of the number of days divided by 365
These derived values are immensely important for the options trader because they give definitive metrics against which the probability of a successful trade can be gauged. An essential point of understanding is that the derived standard deviation gives no information whatsoever on the direction of a potential move. It merely determines the probability of the occurrence of a move of a specific magnitude.
It is important to note that no trade can be established with 100% probability of success; even boundaries of profitability allowing for a three standard deviation move have a small but finite probability of moving outside the predicted range. A corollary of this observation is that the trader must NEVER “bet the farm” on any single trade regardless of the calculated probability of success. Black swans do exist and have a nasty habit of appearing at the most inopportune times.
Let us consider a specific example of a “bread and butter” high probability option trade in order to see how these relationships can be applied in a practical manner.
The example I want to use is that of an Iron Condor position on AAPL. For those not familiar with this strategy, it is constructed by selling both a call and put credit spread. The short strikes of the individual credit spreads are typically selected far out of the money to reduce the chance they will be inthemoney as expiration approaches.
I want to build an iron condor on AAPL in order to illustrate the thought process. As I type, AAPL is trading at $575.60. August expiration is 52 days from today; this is within the optimal 3055 day window to establish this position. Consider the high probability call credit spread illustrated below:
This trade has an 88% probability of profit at expiration with a yield of around 16% on cash encumbered in a regulation T margin account.
Now let us consider the other leg of our trade structure, the put credit spread. Illustrated below is the other leg of our iron condor, the put spread:
This trade has a 90% probability of profit at expiration with a yield of around 16% on cash encumbered in a regulation T margin account. As the astute reader can readily see, this put credit spread is essentially the mirror image of the call credit spread.
When considered together, we have given birth to an Iron Condor Spread:
The resulting trade consists of four individual option positions. It has a probability of success of 79% and a return on capital of 38% based on regulation T margin requirements. It has an absolute defined maximum risk.
Note that the probability of success, 79%, is the multiplication product of the individual probabilities of success for each of the individual legs.
This trade is readily adjustable to be reflective of an individual trader’s viewpoint on future price direction; it can be skewed to give more room on either the downside or the upside.
Another characteristic and reproducible feature of this trade structure is the inverse relation of probability of success and maximum percentage return. As in virtually all trades, more risk equals more profit.
I think this discussion illustrates clearly the immense value of understanding and using defined probabilities of price move magnitude for option traders. Understanding these principles allows experienced option traders to structure option trades with a maximum level of defined risk with a relatively high probability of success.
High Probability Trade Setups: 4 Methods
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 longterm 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 nondiscretionary 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 take our 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 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. Runnersup are support and resistance, patterns, and moving averages.
For triggers, my number one tool is the candlestick and candlestick patterns. Runnersup 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 pin bar at the trend line à a bounce trade
 A breakout candle through the trend line à a breakout trade (the requirement for avoiding a false breakout: a candle close to a close near the low and most of the candle through the candle)
Traders can use different tools and indicators for each of the two roles. The above is just an example but one I use often for my own trading.
“SWEET” SPOTS
The best opportunities, which we name “sweet” spots, are areas where the strong confluence of levels exists AND wide open space is present.
 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).
 Wideopen 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 wideopen space to judge the best and highest probability setups.
Do YOU use decision spots for your trading setups?
How do YOU set up triggers?
Thanks for adding your opinion here below.
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