How to Determine Risk/Reward Ratio on Your Trades (Part 3)

07/22/2009 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

I begin entering buy orders at the lower parallel of the modified Schiff Median Line. I'm in no hurry, because as you can see, although price is clearly vibrating at the same frequency as this Median Line set, it is also trading in a range, right inside the Median Line.

chart
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It hasn't yet traded low enough to fill my limit buy order, but it isn't running away to the upside either. I'll continue to leave my limit buy order where price will intersect with the lower parallel until I can no longer afford the initial stop loss order or until price changes its behavior dramatically.

chart
Click to Enlarge

Though price continues to trade quietly, it finally dips low enough to fill my limit buy order at 907.80. My initial stop loss on the trade will be below the major swing low at pivot C, at 905.80.

chart
Click to Enlarge

Now that I am long gold futures, I have to look left to see what obstacles price may run into. I do this to map the market and because I have to have a realistic profit target when calculating my risk/reward ratio. Note that I am purposely not disclosing my initial profit target right now, because I want to know what profit target you would choose!

Looking to the left, there is a prior high just above 915. I don't think that will be a major problem if price can break and close above the magenta, up-sloping Median Line. Take a close look! Price has been above the magenta Median Line a number of times, but so far, it's only closed above it once. Any close above it now will be above that prior close, and I think, would be a change in behavior.

More tomorrow in Part 4. Read Part 1 | Read Part 2 | Read Part 4 | Read Part 5

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com

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