High probability trades, as the name suggests are those setups where there is a very good chance of your trade closing with profit. There are many books written about such trading setups as well as articles.

Some tend to focus on Fibonacci tools, while others focus on trends and other aspects of technical analysis. Regardless of where you look, such topics often underscore the one and the same, about the technical set up.

But reality is quite different. It is true that technical analysis is a study of past price history to predict the future price movements. And as a result, a certain trading system can indeed point you to what the markets could do. But as you may know, technical analysis on its own is not responsible for moving prices.

Traders should also focus on fundamental analysis. In the end, a high probability trade is just a combination of a robust trading strategy and fundamental analysis that should align together. It is not just about making a winning profit but also knowing when to exit if your bias is proven to be wrong.

Combining fundamental and technical analysis to find high probability trades?

By this point, you should already be asking the question on how you can use these two different studies of the markets. But before we go into the details, let's first address the elephant in the room. It is the proverbial question of what came first, the chicken or the egg.

In our context, the question would be, what can predict price movement first, fundamental analysis or technical analysis?

There is no black and white answer to this. 

On the contrary, markets can change. Sometimes, when the markets do not discount a certain information, fundamental analysis can take the lead. And at times, when the markets are already discounting the information, technical analysis can take the lead. And in some exceedingly rare cases, technical analysis can actually take the lead as the markets react to the information.

Example of a technical set up

Take, for example, the below chart for spot gold. You can see how price action unfolded during the late February, early March periods. The precious metal was in the midst of an impressive rally. It was around the time when the Coronavirus outbreak was just starting, hitting economies around the world.

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Trading set up example using V-Power day trading strategy

One would argue that gold, as a safe haven would rise during such times. And indeed, gold prices were rising. However, on the Monday of March 3, gold briefly tested a 7-year high. This higher high also coincides with the bearish divergence that is forming. This is a regular set up using the V-Power day trading strategy.

If you looked at this from a purely technical analysis perspective, firstly, there was no reason for gold to make a correction. But you could also argue that since there was a bearish divergence, price would correct.

But look no further than a few sessions earlier, where we had another bearish divergence. In this instance, price barely moved lower before resuming the uptrend once again. If you applied the same logic as you did in the latest divergence example, then it should have been true in the first instance as well.

As you can see, price behaved differently during each of these two instances of bearish divergence.

Explaining price action using fundamentals

Now let’s look at the same chart but through the eyes of the market information and the fundamentals.

The first divergence occurred during late January 2020. Around this time, China was making the headlines with lockdowns. But still, the U.S. and quite a few parts of the world were still not that impacted by the pandemic.

Gold price continued to rise as a safe haven bid. But toward late February and early March, the pandemic arrived on U.S. shores. This caught many market participants off guard. Different asset classes all fell, including gold and equities.

The interesting aspect about gold however was that, as equities fell sharply, investors had to fund their margin calls by selling their positions in gold. The Federal Reserve also jumped in, announcing a surprise rate cut.

A mix of various narratives caught market participants off guard and initially, gold also joined the broader market slump.

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Market panic and confusion – Google snapshot of headlines

Perhaps now you can see how fundamentals validate the bearish divergence that we saw in the previous example. While at the outset, both the setups might look similar from a technical analysis perspective, the setups totally change once you bring in the fundamental developments in the markets.

What makes a high probability trade?

As you can see from the above examples, a trading system is only as good as the trader. You can give the same trading system to two different traders and the results will be quite different.

In the end, it all comes down to how much of the market information you can interpret. When you see an alignment between the fundamental and technical analysis, the trade sets up work remarkably well. It takes quite a lot of work, and of course quite a bit of thinking as well.

In conclusion, a high probability trade is a combination of having a robust trading system and combining that information with the market fundamentals.