How to Map Out Support and Resistance Levels Using Fibonacci Indicator

Hello and welcome to another edition of the bulls vs the bears. Last time  we learnt that  the fibonacci was not full proof. And that it could do a 360 on you. This week we are going to learn how to map out  support and resistance levels using Fibonacci  indicator.

Like we said last time, the Fibonacci tool is quite useful. But it can’t be used in isolation. It should be used in unison with other tools to discover the sweet spotup trades that you’ve been  salivating about. So we ‘ll take what we ve learnt and go hunting for those spotups.

If your Fibonacci tool happens to spot  support and resistance levels, combined with other price areas, then chance of price  shooting high from these areas are quite good.

Let’s take a look at an example of such a scenario using a daily chart of USD/CHF

Daily chart of USD/CHF with Fibonacci retracement levels

As you can see the bulls have been running the show. All these green candles make it crystal crystal clear as to who is in charge. The question you should be asking yourself is “When do I make my entry?” Using the Fibonacci tool, you you see the low at  1.0132  as your Swing Low and the high at  the high at 1.0899  as your Swing High. So your chart looks all set with all these Fibonacci retracement levels.

Let’s see how resistance support pans out in the next scenario on the same chart

Resistance turned support at 50.0% Fib?

As you can see we’ve laid a solid foundation to increase our chances of finding a solid entry. But the next question we need to ask is “Where do we enter?

Well as you can see 1.0510 put up great resistance. And coincidenta;;y it just so happened to align with the 50% level Fibonacci retracement level. As you can see the resistance got breached. And once it turns into support, that will be the perfect time to put in your buy entry. Now let’s look at where to place your buy entry.

Resistance turned support at 50.0% Fib holds and price eventually makes a new high

If you put ion your buy order around the 50% Fib level, you should be in a good place.  However we see some hair raising moments when the support level takes absorbs a second bite at the cherry. Price tries to break through the support barrier but is unable to close the deal. Eventually the pair do break through the barrier and continue with their journey.

The same setup can be duplicated on a downtrend. Just look for price levels with similar action from previous price action.  Come to think of it  the probability of price taking a ricochet from these levels are quite high. I can hear someone saying “Why do you say that?”  well support/resistance areas are very popular zones to place buy orders. As such buyers will be keeping a close watch on these zones.

While it’s not etched in stone that price will shoot for the hills from these levels, you can be confident about your chances of your trade entry returning a healthy profit.  IT’s all a question of probabilities. If you stick with trades with a high probability of success, you will come out smelling like a rose.

That’s a wrap for ” ”. How to Map Out Support and Resistance Levels Using Fibonacci Indicator.” Next time we’ll learn how to combine Fibonacci with Trend Lines.

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Fibonacci Can Do A 360 On You…Watch Out

Hello and welcome to another edition of the bulls vs the bears.  Last time we kicked off  our series on the Fibonacci tool with an intro on Doing the Fibonacci. We basically learnt  that the Fibonacci tool was useful for placing trades at support and resistance levels. We event learnt how to to enter a trade using Fibonacci retracements.

However we are going to learn a very painful truth about the Fibonacci indicator. While it’s fun doing the Fibonacci, the Fibonacci indicator  can do a wicked 360 on. you.  In as much as it is able to predict whether support/resistance levels are going to break, they don’t always break. Some  of you are scratching your head saying”Wait a minute. I though you said Fibonacci could predict the future.” Well sure. But it’s not exactly bullet proof either.

Let’s look at a few examples starting with  a 4 hr chart of GBP/USD.

Resistance at the 50.0% Fibonacci retracement seems to be holding

Here the bears have been running things. So you seek the help of the Fibonacci indicator to get you a solid entry point. You pair a Swing  Swing High at 1.5383, with a swing low at 1.4799. As you can see the currency pair has been holding it down at the 50% level. And you’re like” Time to go short on this deal.”

Well News flash! If you so much as try to put in an order at this level you’ll do serious damage to your account.  The next graphic will explain why.

Fibonacci retracement levels failed to hold and price broke through for new highs

What didn’t realize wat that the Swing  Low had mounted a comeback. It managed to rally above the Swing High point.

What’s the moral of the story here?Yes Fibonacci retracement levels create a high probability of success. But they don’t always work. In such a situation you may not know if price will do  a U-Turn to the 38.2 level and restart the trend.

Then again price may hit the 50% or 61.8% levels before doing the turnaround.  Better yet, price may just override the Fibonacci and bulldoze its way past all the key levels like a freight train. You  need to understand that the bulls do not always resume their uptrend after discovering temporary support or resistance but instead zoom past the Swing Low.

Also you need to determine which Swing Low  you want to use. The Swing Lows are not  etched in stone, especially when the trend is very foggy. Not everybody sees charts the same way. Two people may have their biases concerning time frames and technical analysis. How do we clear that fog? By combining the fibonacci with other tools in your forex tool box such as moving averages. This should help give you a higher probability of success. For more information on moving averages look up  We Are Moving Averages Part I and II. 

 

That’s a wrap for ”Fibonacci Can Do A 360 On You…Watch Out  ”. Next time we’ll try and  solve   the support/resistance  quagmire by using the Fibonacci indicator in combination with other forms of support and resistance levels.

Till next time take care.

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Doing The Fibonacci

Hello and welcome to another edition of the bulls vs the bears.  Today we are going to be  do the Fibonacci.  Please if you’re thinking we’re going to learn the latest hip hop dance  you’re at the wrong address. We’re going to learn how to use a very famous  forex indicator called the Fibonacci.

Remember when I mentioned the Fibonacci tool in   my post “How To Calculate Risk Reward Ratio Without Blowing Your Forex Trading Account?” Well  we are going to do an in depth study on this indicator. Now I’m not a huge fan of indicators. They’re  really not part of my trading menu.  But I will make an exception  because it’s quite popular among But the Fibonacci comes highly recommended among traders because of its usefulness in analysis such us support / resistance, risk/ratio, stop losses,  retracement, e.t.c

So here is what we are going to do. I’ll give you the definition, give you the background to Fibonacci and then show you two instances by which you can use the fibonacci rule.

What exactly  is the Fibonacci Indicator?

Well Fibonacci the Fibonacci indicator  uses retracement  to define areas of support and resistance on the charts. You basically use the Fibonacci to draw static horizontal lines to determine where possible support and resistance levels will occur. Now the fibonacci tool was name after a famous Italian Mathematician called Leonardo Fibonacci. He basically had a flash bulb moment when he stumbled on a series of numbers describing the natural arrangement of things in our universe.

Now how did he derive these numbers? He started with 0 followed by 1 and then he added 0+1 to get the third number 1. Fibonacci added the third number(1+1) to get 2 and then the third number and so on. So   you have ratios  in the following sequence:0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144….  Don’t scratch your head about manually calculating these numbers. Your  MT4 software does all the leg work. The most important thing is understanding  the workings behind the the Fibonacci tool.

Speaking of which, the only ratios you need to know for the Fibonnaci are as follows:

Fibonacci Retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618.

There is one little catch though. In order to apply the Fibonacci  indicator  you need to know how to  identify swing high and swing low points.  In case you’ve forgotten, a swing high is a candlestick with two lower highs on its left and right. While a swing low is a candlestick with two higher lows on its left and right.  For more information on swing points look up Do A Little Swing Trading.

I guess the burning question  on everybody’s mind is:

How Do We Use Fibonacci Retracement To Enter A Trade?

Before you consider kicking the the Fibonacci tool into  action, there is one thing you need to understand about the Fibonacci. And that is, the Fibonacci only works when there is a strong trend in the works. If the bulls are in action you go long(or buy) at the retracement level at a Fibonacci support level. But when the bears take over, you do the complete opposite. You go short(or sell) on a retracement at a Fibonacci resistance level.

Fibonacci retracement levels are quite useful to the trader. Their job is to attempt to predict where price will hit in the future. You could say they play a prophetic role. Some of you are probably wondering”What’s the theory behind the workings of the retracement levels?”  Well, the secret is whenever either the bulls or the bears start a new trend  price will retrace or pull pack to a previous level before continuing on their journey.

I guess the next question  we have to answer is

How Do we Find The Fibonacci Retracement Levels?

Like I alluded to earlier, you need to locate the latest swing highs and swing lows. If you see the bears in action click on the Swing High in your MT4 chart and drag your cursor to the most recent Swing Low. But if you happen to spot the bulls  click on the Swing Low and drag the cursor to the most recent Swing High. Let’s take a look a look at how to make those retracement levels work on the forex markets, starting with the uptrend

Daily chart of AUD/USD with Fibonacci retracement levels

Ladies and gentlemen, This is a daily chart for the AUD?USD pair in the uptrend. The horizontal and diagonal lines  represent  retracements levels of the Fibonacci indicator.  Look out for .6695 close to the .7000 line. As you can  see you plot Fibonacci retracement levels  by clicking on the Swing Low at .6995 on April 20  and then drag the cursor to the Swing High at .8264 on June 3. This creates a diagonal  line right across the chart.

Voila! your software then calculates  the retracement levels like clockwork.  You don’t need to pull your hair out doing any weird calculations. Oh! by the way the faded numbers next to the shaded areas on the shaded areas in the far right corner are the retracement levels.

Let me break this further down in simple English. IF the AUD/USD pair pulls back from a new high  one of the retracements levels will provide support as the pair look for a landing spot. Why? because  traders will be placing their buy orders at the retracement levels as price does its pullback.

Now let’s see what happens with the Swing High

Fibonacci Retracement: 38.2% Fib level held as support

Well we see that price retraced to the 23.6 level and continued with its slalom run  for the next few weeks.  See how it tried to breach the 38.2 level but failed to close the deal. See how price resumed its bullish run on July 14th and eventually breached the Swing High. It’s pretty obvious that putting in a buy at the 38.2 level would have been profitable long term.

Now let’s look at retracement levels in the downtrend using the 4 hr chart of the EUR/ USD pair.

4-hour chart of EUR/USD with Fibonacci retracement levels

Look at the Swing High at 1.4195 and the Swing Low at 1.3854.  The shaded areas in the far right corner are the retracement levels. What’s the expectation here? That  if price retraces from this Swing Low, it could run into resistance at one one of the resistance levels. This is because traders wanting to trade the downtrend may want to put their sell orders  at that level.

So what happens next?

Fibonacci Retracement: 50.0% Fib level held as resistance

Something interesting is happening here. First price mounts a daring rally, and then gets stopped  in its tracks below the 38.2 level, before trying to breach the 50% level. If you place your sell orders at the 38.2 or 50% level you stand the chance of making some ridiculous profits.

Now what did  we learn about price from these two examples? Price run into into brief support or resistance at Fibonnaci retracement levels. Now if most traders believe a retrace will occur at a Fibonacci level and are anticipating price to touch that level, then all those pending orders will have a major influence on price.

 

That’s a wrap for ” Doing The Fibonacci ”. Next week we’ll find out  what happens when retracement levels do a 360 on you.

Till next time take care.

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How To Profit From Finding The Best Trade Entry Points

 Hello and Welcome To another edition of the bulls vs the bears. Today we are going to learn how to profit from finding the best trade entry points.  Your trade entry should satisfy two requirements: reliable stop placement and humongous risk/reward potential.

I can hear someone saying”That’s easy for you to say.” Sure perfect entry points may be as rare as the eclipse of the moon.But it takes a little patience and a hunter’s mindset to spot them. So we’ll do two things. We’ll do two things we’ll look at three strategies fir for finding the best trade entry point.  

First off:

Two Strategies For Finding The Best Trading Entry Point

First things first, look out for obvious price signals. The price signals should be as clear as day that you’d be blind not to see them. The daily chart frame is a good place to start from. Why? because the signals and patterns are so crystal clear you can’t afford to miss them. Next you are looking for confluence of factors that back up the signal.. And by that I mean you look back at the previous trading periods to check whether the signal aligns with other key levels or has formed via a pullback.

For more information on confluence of factors look up Something Called Confluence

Basically make sure the signal lines up with as many supporting factors as possible to constitute the best trade entry point. If you are thinking of tweaking your trade entry, don’t even try it. you will receive severe burns to your trading position.

Now some of are asking:

Why The Wait For A Better Trade Entry?

1) First off, it  frees you to insert a tight stop loss which in turn makes you a profit on a substantial risk/reward. This means you can trade for a bigger position size.

2) You reduce the risk of being stopped out for a huge loss because you placed your stop loss out of harm’s way. by that I mean you placed your stop loss in a safer place.

3) You get to wait patiently while the trade forms. patience comes in handy especially if you are not totally sure that the trade is worth risking your precious cash on. While you wait patiently you place your stop loss. In so doing you save your self the heartache of a tsunami-sized stop out no to mention being wiped out by the market itself.

Now that we have gotten the reasons out of the way, let’s look at  a few examples of spotting the perfect trade entry

Image result for pin bar sell signal

Ladies and gentlemen, here is a clear bearish pin bar signal(circled in red) along the level of resistance via the GBP/USD pair. The tail of the pin bar is obviously sticking out like a sore among the neighbouring bars. This must tell you that  the bears are planning their reversal and that they are going to push price further down in the future.

Now let’s look at the factors supporting the sell signal using the AUS/USD pair

Using-Pin-Bar-Price-Action-Trade-Forex-Confluence

As you can see the evidence required to make a trade entry is  there for you to see.  We see  a downtrend that has been developing for a month with the signal developing after a pullback to the level of resistance. The signal so obvious that you don’t need a bolt of lightning to tell you that it’s time to make the trade. And of course the risk/reward potential is huge.

Since this is a long term trade you don’t need to stare at your screen like a bodyguard. Just get out of the house and head to the beach while your trade entry racks up the profits.

Now we’ll look to tweak our trade entry and improve our risk reward potential

Image result for how to improve on risk reward potential of forex trade

Here we try to make our entry at the 50% point of the pin bar. There is no way we can get it at exactly 50% as it’s literally impossible. Not even Einstein could have got that right. But you can make your grand entry at the point of retrace just under the the 50% point and with a stop loss just below the pin high.  Aside placing a stop loss you could improve your risk potential from RR1 to RR2 as indicated above. Some have been known to increase the risk/reward to RR3.

Now let’s look at another entry example using the daily time frame

Image result for forex pin bar in daily chart time frame

Ladies and gentlemen, here is a trade entry in the daily time frame via the EUR/USD pair. We have a bearish pin bar forming as a result of the bears doing a sharp reversal. And just like the previous example, the pin bar clearly sticks out like a peacock. You can’t miss it.

As you can see a pin bar formation is taking place at the level of resistance  on the weekly chart. It’s pretty much consistent with the pin bar formation in the downtrend of the daily chart frame.

Massive pin bar

Finally let’s take a look at  a long tailed pin bar setup in the daily chart

Clearly we see a long tailed bullish pin bar at the level of  support on the right side of the chart.  That of course kicks of the bullish charge.  With your knowledge of long tailed pin bars, nobody needs to tell you that’s a the perfect entry point to put in your trade. No to mention the huge risk/ reward benefits that you will accrue from this setup

That’s a wrap for “How To Profit From Finding The Best Trade Entry Points”.   What you  need to understand from this lesson is that the best trade entries form with the help of supporting factors.  Basically you are looking for the coming together of a signal and a level, or  a signal and  a trend, or even a level and a trend

The trend at the time should be painfully obvious with the signals formed at a key level. With a little patience, training and reliable instincts you should be able to make your entry with consummate ease.

Till next time take care.

 

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It’s not The Quantity of the Trades… It’s The Quality

Hello and welcome to to another edition of the bulls versus the bears. Today I have another simple message for you. It’s not  the quantity of your trades..It’s the quality. There is absolutely no need to enter trades day in day out as if your pants are on fire. If you’re afraid of missing the next big market wave? Don’t bother! If you miss what you believe is a juicy trade pattern, you’re sure to see it the next day. Keep your fears at ease!

Don’t act as if forex trades are “reduced to clear situations”.  The forex market is not up for sale that you have to trade as if every trade could be your last. Do you know what this kind of strategy is called? It’s called overtrading. I can hear somebody asking:

What Constitutes Overtrading?

First off, you are always in a trade. You feel you absolutely must be in every trade or else you are going to lose your sanity. You are so obsessed with the forex markets and your trades that you go to sleep with your trades and dreaming about the next trade. Even worse, you are involved in multiple trades which is forex suicide. But you can get away with multiple trades  only if you apply solid risk management.

IF you want quality trades just trade at least 6 times a month. Or  pick one or two high probability sets that are  solid enough to keep you outside of the house for long periods of time. Just set and forget and smell the roses.

Let me show you how overtrading affects your trading process and your trading account

You Trade Too Much You Blunt Your Edge

Yes! When you trade too much your trading edge  becomes blunt. Instead of focusing on quality trades which give you an advantage over other trades you settle for bread crumbs. By bread crumbs I mean low quality trades that fall outside the criteria for your trading edge. And when you  do that, your chances of prosperity become slim.

If you want your forex trades to  be high quality you need to know the difference between market noise and high probability price events(trades). Now market noise is a fancy term for sideway markets while high probability price events are, well. high probability trades. It’s absolutely crucial that you know the difference between these two trade categories or else you may end up taking trades that are nothing but loud speaker thumping noise and not real price signals. Even worse they end up blunting your precious trading edge.

For more information  on market noise and high probability trades look up Forex Market Goes Sideways and How To Spot High  Probability Trades.

Brokers Get Rich At Your Expense

The more you trade the more forex brokers get rich at your expense.  Of course I can hear somebody asking “But how do these brokers get rich at my expense?” They get rich through the spreads and commissions that they charge you. So that every time you trade they make money from your trades. So if you want to gain an edge over your broker,  TRADE LESS!

Too Much of A Good Thing  Is Bad

I’m sure most of you know the phrase “Too Much Of a Good Thing Is Bad.” You like something so much that it become an addiction to you. The same thing scenario applies when you trade too much. You become  fixated with the trading process that you feel like you have to jump into the market at every  opportunity. tlike gambling. You get this huge adrenaline surge  to blow all your money all at once. And when that happens all your money is gone.

So How do you cure your trading addiction? By laying out a trading plan where you identify your trading edge which will guide how you enter your trades on the market. Failure to develop a trading plan could be highly detrimental to your trading health Your trading addiction becomes progressively worse and you  will end up blowing up your  trading account. Two things could happen in the process. Either you learn your lesson and go back to trading the right way or you become so dehydrated from your addiction that you end up quitting as a trader all together.

I guess the appropriate question is:

How Do I Cure OverTrading?

First:

Trade Less

You need to trade less. In other words you don’t need to trade 70 times a month.  The ideal number is 5-7 times a month. Anything beyond that is a crazy addiction. While you are at it, put some strict rules withing your trading plan. At the same time add some flexibility to your trading plan to complement the rigidity. By that I mean where you place your stop loss, How you enter your trade, How much you can afford to risk, e.t.c.

Look For Trade  Setups Which Align With Your Trading Plan

You need to look for trade setups that align with your trading plan.  You must identify setups that satisfy the criteria in your trading plan, visavis your trading edge.  And while you are it, apply what is  known as a T.L.S. filter. Basically you create a set of criteria to ascertain whether the trade is worth risking your money on.  The filter must satisfy two  at least two of these criteria:Trend, Level, and Signal. These criteria are what you call multiple factors of confluence.  For more information on multiple factors of influence look up Something Called Influence

You need to adopt the mentality of a hunter waiting patiently for his prey to appear. It doesn’t  mean you go after every trade your eagle eye  spots on the chart. You only save your cash for trades that you know will take you to the Promised Land. Just like a hunter who only so many bullets to waste, you have only so much cash to risk. So be frugal with your money or your trading account will blow up like dynamite.

Set and Forget 

I’m quite sure you have heard this phrase”Set and Forget.” It’s a simple but effective approach. All you have to do is set your trade, forget about it and get on with life while the trade rakes in the moolah for you. Instead of jumping into the next available trade let your original entry play out for as long as possible to allow your your profits to accumulate.

You need to understand that solid trades take a while to play out . And if you want to catch the big waves on the market you need to adopt the hunter mentality that I alluded to earlier. Stay patient with your cash cocked, and when the opportunity presents itself, you pull the trigger. This also means that you stay away from your screen. Take a chill pill while your entry racks in the cash for you. In so doing you improve your chances of making substantial trades. You certainly do not need to trade loads of times to rake in those profits.

And Finally

Stick To One Market Direction

Please stick to one market direction.  If it’s the bullish trend you enjoy trading with do that. If it’s the reverse trend, by all means  do that also. But whatever you do, STAY AWAY FROM CHOPPY WATERS. Because you will crash and burn. The market is moving  sideways in this scenario. All you have here is a whole lot of noise, and the price signals aren’t that clear either.

And when you do get burned in choppy waters, you are tempted to jump into another trade again(Trade addiction anybody?) That’s highly dangerous and inflammable in that your trading account could end up in flames. So your best option would be to stick to markets that are strongly trending and moving in one clear direction.

For more information on sideways markets and trends look up Forex Market Goes Sideways and Trade Trends with Price Action Analysis

 That’s a wrap for “It’s not The Quantity of the Trades… It’s The Quality”.  Less is more where forex trading is concerned. Unlike what people may think here are not too may  trade setups to go around throughout a calendar year. So it does not make sense that you go kamikaze looking for trades like a chicken with his head cut off.  It only make sense to be less conspicuous on the market. The less you trade, the better your health will be.

Take a low frequency approach when trading. But that’s not to say that you don’t turn the other way on  the most obvious trade setups. Of course it takes considerable skill and education to identify the most obvious trade setups. I mean you don’t just accomplish these at the snap of your fingers. With the help of  price action techniques such as Set and Forget, you should be able to nail down obvious trading setups with ease.

Till next time take care.

 

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Put In Your Risk You Get Your Reward

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Hello and welcome to another episode of the bulls vs the bears. Today I have a simple trading message:Put in your risk you get your reward. We are going to a close look at the concept of risk/reward in forex trading. Let’s get one thing straight.  Trade setups is all about possibilities. If you can visualize these possibilities  in terms of risk/reward you  should have no problem achieving consistency in your trades.

Now how do we achieve consistency in  trading? Develop a sharp instinct for identifying clear and unadulterated trade setups. Of course  You need to be at the right place and at the right time to spot these setups.  It’s like  the watching the eclipse over and over again.  Risk to reward trade setups give you a significant opportunity to make consistent profits.  So if you are able to master the risk/reward process, you’re on your way to the promised land. So how do we master risk/reward? First:

Draw Risk/Reward Levels

You need to draw risk/reward levels or ratios. before deciding on how much you want to risk.   Basically all you are doing here is calculating how much money you are willing to risk to give the trading setup the opportunity to convert from probability to actuality. Please do not think of reward first before risk. OR you put a stop so tight that it could choke the life out of your trade. Do any of these , and you will burn a huge hole in your trading account.

Now why do I say calculate risk first before reward? Because you want to create a heightened sense of awareness of the risk involved in each trade setup. In so doing you don’t obsess  too much how huge a profit you are going to make with the setup. In so doing you are able to manage risk more effectively than merely entering a trade like a gambler. The best traders in the business are the best because they are great risk managers.

Now once you have identified the trade setup and labelled the risk level, you then label the reward levels as multiples of your risk. Now there are three levels you need to draw: 1* the risk, 2*the risk, and 3* the risk. Now let’s take a look at a few illustrations of drawing risk/reward levels breakout trap and reverse trade reward Right in front of you is a perfect illustration of risk levels drawn on a bearish breakout trap and reverse trade. As you can see the risk/reward levels are nicely  labeled from 1:1 through 1:3. The risk(labelled RISK) was entered as the bears broke out on the slope. However, the reward was achieved at the bullish reversal trend as price hit the 1:3 ratio. 

This is the classic case of price action and money management working hand in hand. Conventional wisdom says  a ratio of 1:3 is the optimal as far as getting a huge return on your investment. However, a note of caution: The higher the risk ratio, the harder it will be for you to get a return on your investment. That’s greed talking, not trading logic.

Let’s look at another illustration using the support/resistance route In this instance  we see the trade going long.  So naturally you let the trade run until you claim your profits at the resistance level. If you want to go short you claim your profits at the level of support. This technique only works during ranges or weak trends.

You don’t need to go for absolute highs in this scenario.Why? Because the market may not reach those levels and then do the reverse. Besides the market is in range mode which makes absolute highs/lows a pipe dream. So what’s the moral of the story? Since the market is in range mode, you don’t need t0 gung-ho with your risk/reward. Just take a conservative stance and exit  with your loot a few pips earlier.

Use of Trailing Stops

Now should you want a a trade setup run forever, you will want to employ the use of the trailing stop. Now in case you’ve forgotten, the trailing stop is a market order that is placed below the market price. Somebody is probably asking”How Do we do this?” First set your risk ratio levels. But this time let the trade run without  a set exit target. Once the market moves in your direction, you use your pre-set reward levels to trail your stop loss. In so doing you stand a chance of locking in some serious profits and lessening your risk at the same time. The best way to use the trailing stop on risk/reward levels is when the trade is one or two times your risk.

You can also bring your trailing stop 50% closer to the entry level trade once the trade has hit the the 1R level. Reason being that you want to give the trade some air or room to breathe.  So that if you are up 1 to2, you trail your stop up to lock on 1 times your risk. If the market moves at 1:3 you  you trail your stop to lock in 2 times your risk. This technique is quite reliable. Why? because you are locking inn on your profits while at the same time leaving open the possibility of the trade turning in your direction. Now let’s a look at an illustration of the trail stop  on a pin bar setup. download

This is a nice illustration of using a trailing stop to lock in your profits. The “R” represents the risk Entry level is at the engulfed level. You put your stop loss at the tip of the candlestick. Now as you can see the uptrend is running away and racking up profits at every turn. Why,?it’s because you have no set exit plan, paving the way for you to lock up more profits. For more information on trail stops look look up Forex Basics -Top To Bottom Part II.  I suggest you read up on Forex Basics Top To Bottom – Part I  so as to get the full trading pictujre

So How Do Achieve Consistency  In Risk Reward?

Very Simple! DON’T MEDDLE WITH YOUR TRADES! Stay out of them. You don’t want to enter a trade at a risk/reward ratio of 1:2. Later you enter a low probability trade and incurr a loss. When you do this you limit the power of risk/reward, not to mention your own potential to achieve as a forex trader.

Let me illustrate what I’m talking about. Let’s say you are losing 65% of your trades at a ratio of 1:2 and you risk $200 on each trade. This means you are losing  35 out of 100 trades. This means you’ve lost 65*200=$13,000.00 However, you  made 2 times the risk on your winning trades($200):65*400=$14,000). So after 100 trades you made a profit of $14,000 even though you lost 65 of them. See the power of risk/reward? So what’s the moral of the story? You can still make money from your trades even if you lose more trades than you win. Just stay out of the way and let the market do the heavy lifting for you

That’s a wrap for “Put In Your Risk You Get Your Reward.” It takes discipline combined with knowledge to master Risk/Reward concept. Plus, you can’t second guess yourself either.  With these two concepts you could be the Usain Bolt of forex trading.  Just allow the trades to play out and you’ll be laughing all the way to the bank with your profits- even if you lose more trades than you win. It’s a win win situation. Til next time  take care.

 

 

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