What's a Probe Trade?
A probe trade lets you test the waters by starting with a small position size when there’s some kind of uncertainty. When the uncertainty has been resolved, you can increase your position size to the full trade amount.
It's a way to manage risk by easing into uncertain trades and only committing fully when the situation improves.
What’s a Probe Trade?
Surprisingly, it’s not about being poked by aliens! A probe trade is just a way of approaching trade opportunities when there’s a bit of extra uncertainty involved.
There are situations where a setup meets your entry criteria but still leaves you with some doubts, a probe trade is your way to enter a trade without committing to the full position size up front. Think of it as testing the waters: you enter a smaller part of the trade and only increase to the full amount once that extra uncertainty clears up.
Here’s an Example:
Let’s say you’d usually risk 1% for a certain type of trade. That’s your “full trade.” But since there’s uncertainty, you decide to start with half of that, 0.5%, and go to the full 1% once the uncertainty is gone.
The main difference between a small full trade and a probe trade is how you handle risk. A small full trade is the whole position from the start, while a probe trade lets you start small and scale up when the situation is clearer.
Imagine you’ve got a bath waiting, but you’re not sure if it’s too hot. You wouldn’t just jump in, right? You’d dip a toe first to see if it’s bearable. If it feels okay, you slide in. A probe trade is similar: you start small and fully commit once you know the conditions are right.
When to Use Probe Trades
While a probe trade is a good way to reduce your risk in uncertain situations, the price may move in your favour too quickly to scale into the rest of the position. That reduces your profit, and means we should be selective when we use a probe trade.
Here are two situations where we'd consider a probe trade with the Duomo Method:
- Unconfirmed Levels: If one of the significant levels is unconfirmed, you enter with a probe trade. Once both are confirmed, you scale up to the full trade.
- Nearby Major Levels: If there’s a major significant level close by that might attract the price, a probe trade lets you get in early, so you’re ready to profit if the price reverses. However, if the price interacts with that major level, you increase to the full position size.
Overall, probe trades help you keep your risk low when there's an element of uncertainty, but the entry is still viable.
Have a think through situations that cause some uncertainty but don’t necessarily rule out a trade based on your approach, that could be an opportunity to use a probe trade.