How To Set A Reachable Target?
Price Action Lesson #8
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7 days, 5.41% profit and almost 1:3 risk-reward
That is the result of an S&P500 position. Let’s see it.
There were actually two trades because the market hit my stop-loss a week ago and I had to re-enter. That second trade is still open, and it is the reason why I’ve decided to share with you some truths about how to exit a profitable price action trade.
For most traders, 7 days is eternity. Some can’t even hold a position open for 7 hours 🙂
But you know what – we have to do it. Because this is the way to reach a good risk-reward ratio.
Why we need such a big ratio? Why not just “take what is mine” and close the trade sooner?
You can! And probably somewhere in the world, there is a trader who is making money by taking very small profits.
But be aware that by doing this the probability to reach success in trading is not on your side. And those are not only my words. This is what various researches show. Some of the biggest retail brokers have studied their clients, hundreds of thousands, maybe even millions of clients and found out that those who were able to achieve a risk-reward of 1 to 1 became profitable traders during the first year after they opened their account.
There are different explanations of why 1:1 is so important but just accept it and try to achieve it. If you are not sure that you’ll be able to get profit at least equal to the risk you’ve taken, don’t take the trade.
Alright, by now you’ve probably noticed that my position is about to reach 1:3. Also, if the market hasn’t hit my stop-loss, those two trades would have been only one trade with 1:5 R/R!
Why am I waiting for so long after it reached 1:1?
In the previous lesson, we’ve discussed that opening a position on a higher short-term low means that the previous top is our first target. That is true, but most of the time this previous top is not that far away. And if calculated, such target will be around 1:1 risk-reward. Sometimes it will be larger but quite often it is below that ratio. In that case, we need something else.
On May 27th, I’ve written on the Facebook page that “I see an increased probability for the S&P500 to reach 3130”. Back then, the S&P500 was 3028. On June 6th it is 3118, almost at that level. You can see the post here.
How did I know that?
As you know, I use the techniques shown in the Talking Chart book to read the chart. But to forecast a price, that is not in the book. It isn’t, so let’s learn a way to define a distant target. And the good news is that it is based on price action.
Take a look at the next chart.
To find the next target, point D, we need to measure the distance from B to C and then add it to B. Same is true if we were looking at the downtrend scenario. You can also use a Fibonacci extension and place it on points B and C. In this case, the 100% level is where our target should be.
Pretty simple, isn’t it?
Let’s go back to the real chart again
This is how I’ve set that target 3130.
You can use this rule in all markets. But have in mind that this is a zone where the market is supposed to go. But will it go there and what will happen in this zone is something we can’t foresee. That is something the chart could tell us.
That is the reason you don’t see a fixed limit order on the screenshots. Because I am trying to capture the maximum by reading the chart as it is explained in the book, the checklist and the video upgrade.
See you in lesson #9!
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