Placing High Probability Trades using Fibonacci Levels

Placing High Probability Trades using Fibonacci Levels

In my last post I mentioned placing a pin in the discussion about finding trades after Fib levels were identified. In today’s post were going to pull the pin and continue our conversation about high probability trades.

Moving forward, we’ve got Fib lines littered across our charts and have made our case for why price will proceed one way or another, but what now? Now we setup a high probability trade to capture some profit from our analysis. Have a look at this video for a great discussion on high probability trades.

Identifying High Probability Trades – The Foundation

Before I begin my rant about the importance of high probability trades, please understand that high probability should also mean realistic. In fact, if you understand that simple idea then setting up trades will be a picnic.

However, let me explain what I mean by realistic…

Assume I’m bullish on a stock and I’ve decided I want to trade one of two options strategies. A.) I’ll trade a single long call option, or B.) I’ll trade a vertical spread. Both strategies would make sense given our bullish sentiment but which offers a more realistic chance at profit?

The answer, of course, isn’t simple. We must ask some follow up questions to identify which trade offers the highest probability of success, or said within this context, the more realistic probability of success.

Strictly as a general rule, the correct answer would be the vertical spread. Why? Because the vertical spread limits losses and counteracts several negative factors working against the long call.

Finally, and maybe most importantly, is don’t expect life changing profit from a single trade. Aim for a practical profit and get on with the next trade. Cool? Let’s proceed…

Identifying High Probability Trades – A “Realistic” Example

With a realistic mindset firmly established let’s move forward with an example.

High Probability trades example
High probability trade using Fibonacci Levels (image 1)

From the image above it should be easy to see that Apple has found support at the 23.6% line and is behaving bullishly. Lets capture this move with a long vertical call spread.

High Probability trades example profit/loss
High probability trade using Fibonacci Levels (image 2)

I’ve selected an out of the money bull call spread with a max loss of $75 dollars and a max profit of $425 dollars. Let’s see how we did.

High Probability trades example profit/loss
High probability trade using Fibonacci Levels (image 3)

After one week I’m up $28 dollars. Not too bad, right?

Now, I know what your thinking, your wondering about that $425 max profit. Admit it, I do to, but is that a realistic expectation? The answer, of course, is no. To expect $425 dollars in profit on a trade that was OTM and only 40 days to expiration is only going to happen maybe 1:1000 or probably worse but I think it highlights my point. We as traders must maintain an expectation in line with reality and avoid the trap of shooting for the stars on every trade.

I hope this brief discussion has opened your eyes to maintaining the proper expectation when setting up high probability trades. Additionally, it’s human nature to see that $425 figure and think, $28 dollars is just no good, but understand that in time you can easily multiply that $28 by 100 if you wish. Unfortunately, you’ll have to cross that bridge without me because the risk would terrify me.

May God bless and keep your trading profitable.

Jeff

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.