It is very easy to gauge the trade setups and pick the strongest ones. We do this to enter the markets only when there is a strong trade setup, because they are less risky to take. I mean, a too strong trade setup which is known as a 100 score trade setup by us, has a lower risk to take, compared to a trade setup that has some negative points and is not a 100 score setup.
This makes a big difference in long term. It means, those who take the 100 score setups only, will have a higher success rate and will be more profitable in long term, compared to those who take weak trade setups.
Of course, it doesn’t mean that markets always move accordingly after forming a 100 score setup. Even a too strong trade setup can hit the stop loss, and the market can move accordingly for several days or weeks after a weak trade setup. However, this is what we never know. We never know how the markets move after a trade setup.
All we can do is that we enter the markets after the strongest setups, and set reasonable stop loss and target orders. How the market moves after that, is out of our control.
There is another thing that we can control. It is the amount of the risk we take. When a trade setup forms, we should locate the stop loss level and calculate our position size based on the stop loss size and the percentage of the risk we want to take.
So, what makes a trade setup stronger than others and what are the characteristics of 100 score trade setups?
1) The Candlestick Pattern
There are so many candlestick patterns, but only some of them are strong, and the markets usually move accordingly after them. The rest, aren’t strong enough, and are money suckers: Candlestick Patterns and Signals that Make Money
Additionally, the candlesticks that form the signals have to be long enough and strong, otherwise they have to be skipped.
2) The Market Situation:
Reversal trade setups that form on the trending markets have to be ignored, because the markets usually continue the trends even after a few reversal setups. When the markets are trending, we should only take the continuation setups. We can take the reversal setups only when the trend is exhausted.
In general, we follow the party that has taken the control. So our job is to know which party, bulls or bears, has the control.
When there is an uptrend, it means bulls have the control. So, going short because of a small short trade setup is wrong.