What I want from the markets: a great setup with a tight stop loss and massive potential rewards. That way I can take a small risk with a large position size and an enormous profit.
Suspect you’d like something similar from your trading?
How’s that going for you?
Losing more often than you win?
Tight stop loss levels can be problematic, as can trying to put ‘what we want’ onto market setups.
Let’s take a look at a setup here …
We have a relatively tight range, and I want to get a 2:1 reward-to-risk ratio, tucking my stop in at the bottom of that range …
But, when I’ve entered this trade just above the range, my 25-point stop is really now very tight below it.
If the price were to dip down to this stop level, it would still be considered within that ‘range’. Essentially, I’d be selling in a zone that my set-up tells me is a BUY.
By ‘wanting’ a tight stop loss, I’m getting into a trade setup that just doesn’t make sense.
There’s no way I should be exiting at the bottom of that consolidation range. My stop should be lower, out of reach of short-term spikes down. I should only be exiting the trade if the price behaviour negates that setup.
Almost trades, where a tight stop loss lets you down
It’s a trap many of us fall into again and again. It’s very close to a good trade setup, but by having our stop just a little too tight, we’re exiting exactly where we should be entering.
It comes from applying ‘what we want’ to charts and making ‘what the markets are offering’ fit into our plan.
The reality is that our stop on this setup needs to be lower …
So, what does that mean for our trade? And our risk-reward profile?
Static VS Dynamic
Let’s consider what levels are moveable, and what levels aren’t …
As we’ve seen, wishful thinking shouldn’t affect where our stop goes. Likewise, how much profit we’d LIKE to make, shouldn’t affect where our profit target is.
Unless there’s technical reasons that we can expect the price to move this far, pushing out a target just because we want to maintain our RRR is bad practice.
Whatever technical tool you’re using for the positioning of a target – it might be Average True Range, Fibonacci levels – your target should be as solid as your stop level.
So, what we have are two static levels: our stop and our target.
The job of the successful trader is to find a dynamic entry between these levels that makes this trade worth getting into.
In this scenario, we’re waiting for the pullback within the range …
What we traders often forget is that the most dynamic level on your charts – the one level that we really have control over – is our entry price.
5 secrets to getting the trades you want (and winning them) …
- 1. Don’t take trades that aren’t ‘worth it’ in terms of risk-to-reward
- 2. Be patient – a retest of support/resistance is your best friend in getting a tight stop loss with a generous reward.
- 3. Ask yourself whether the price hitting your stop level would negate the trade setup. If the answer is ‘no’ – your stop is too tight.
- 4. Never position a stop level based on ‘how much I’m prepared to lose’. Instead rely on technical analysis (like average true range, or support/resistance). If the risk is too great, reduce your position size, or get a better entry.
- 5. Think of your stops and targets as static, but your entry is dynamic.
Success in the market is about fitting what you want to what’s on offer. If you try to bash heads with the market, you’ll come off the worse. There’s plenty of potential for profit out there – just work with the markets, rather than against them.
The post 5 secrets to getting the trades you want (and winning them) appeared first on Traders Bulletin | Free Trading Systems.