A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
How To Avoid Getting “Washed and Rinsed” in the Markets (Part 9)
07/31/2008 12:00 am EST
Now, I draw in a new line, a line with the same slope as the Lower Median Line Parallel that connects the lows of the last two bars. This is a Sliding Parallel and it shows me where price has support [in effect, where other traders have put limit buy orders to enter fresh long positions].
I now have an indication that buyers are in control of this market and I have the beginnings of a high probability trade entry pattern. Let me draw it out for you:
If price pulls back to the sliding parallel, I will buy the re-test of the Sliding Parallel at 1.5642
My initial stop loss order will be five ticks below the low of the bar that first tested and peeked below the Lower Median Line Parallel, at 1.5629
If I am filled on my limit buy order at 1.5642, my profit target will be where price intersects with the Median Line, at 1.5849
I am risking 13 pips on this trade to make a potential 207 pips. That gives me a risk reward ratio on this trade of 207/13 = 15.9 to 1
Because I am using 240 minute bars, I expect I will have to hold this position overnight, so I am looking for high risk reward trades. This is a very nice risk reward ratio with a very small stop. I will certainly try to enter this trade.
Price came down and tested the Sliding Parallel again two bars later. Note that I had to move my limit buy order from 1.5642 to 1.5649 because the Sliding Parallel has an upward slope. I was able to get long at 1.5649 near the low of the second bar. Then price climbed quickly out of the hole and the same bar closed near its highs, with great separation above both the Sliding Parallel and the Lower Median Line Parallel. This is a great sign of strength and it reconfirms that there are buyers below this market now and they are currently in control of the price action.
Once I see my price print, I check that my order is filled. Then I double-check that my initial stop loss order is still working in the market. Now I place my profit order, a limit sell order at 1.5849 in the market.
Price moves higher in an orderly fashion. After leaving triple tops and a spike slightly higher, it dips to re-test the Sliding Parallel. When it quickly climbs back higher and makes a new high for the move, I cancel my initial stop loss order at 1.5629 and replace it with a new stop profit order ten ticks below the spike low that just re-tested the Sliding Parallel, at 1.5678.
I am now playing with the market's money, so it is now a matter of managing the trade, looking for ways to minimize my risk while trying to allow the trade to mature. This is the part of trading that many traders find tedious and tend to neglect, but it is this part of trading that can really maximize your profits once you master money management.
Note that I also cancelled my original profit target at 1.5849 and placed a new limit sell order at 1.5900, because the Median Line is an up sloping line and as price moves to the right on my chart, I need to get paid more for taking the risk of holding my position longer.
After I cancel and replace both my stop profit order and my profit order, price consolidates in a narrow range. After four relatively narrow range bars, it spikes higher again, making another new high for this move.
I cancel my stop profit order at 1.5678 and replace it with a new stop profit order ten ticks below the low of the narrow range, at 1.5751. Then I cancel and replace my profit order, moving it from 1.5900 to 1.5927 because the Median Line is an up sloping line. The longer I am in this trade, the longer the time my capital is at risk, so I need to get paid more if I am going to stay in the trade longer. I keep moving my profit target higher by measuring where price will intersect with the Median Line after each bar closes and adjusting the limit sell order to that level to try to capture the maximum profit.
I am able to move my profit order higher one more time, by eight pips, and then price hits my limit sell order, taking me out of my long euro FX position at 1.5935 for a profit of 286 pips. My initial risk on the trade was 20 pips, so this trade had a tremendous risk reward ratio.
More in part 10.
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