Here we are going to look at some live examples and show you some techniques to enter and set stops to target low risk high reward trades.
Last week we showed you this in the B Pound and our view was right and we made a great profit.
Now let’s look at another live example.
1. Never Buy Dips without confirmation
One of the biggest mistakes novice traders make is to buy into dips or sell into resistance.
Most traders will buy into support even if prices are going down and then they hope support holds.
This is a great way to lose your money “hope” should not be part of any traders vocabulary.
2. Getting The odds on your side
Never ever trade unless price action or momentum supports your view.
If you want to buy into support or sell into resistance wait for it to hold and trade when the momentum turns – You then have the odds on your side.
It will also stop you trying to predict where price action may go.
We did just that shorting the B Pound US Dollar.
We waited for resistance to hold and then used the stochastic indicator (read up on it’s a great momentum indicator) to enter.
As soon as the stochastic indicated waning price momentum by crossing with bearish divergence we went short.
Put the stop behind the resistance and targeted the bottom of the range and thankfully it went well.
This trade had tight stop, price momentum on our side and clear target.
Why confirmation is so important
It stops you imposing your view on the market and will keep you out of losing trades.
A good example was last week we wanted to go short the Yen.
Pull the chart up at a chart service futuresource.com (is a good one)
Here we will use the futures IMM contract but cash is same logic.
We wanted to sell last week but prices rose but we didn’t jump in we need confirmation.
So we waited for stochastics to cross with bearish divergence.
It never came.
Prices broke through resistance and are going up.
The fact we waited for confirmation stopped us imposing our view on the market and saved us a loss.
Outlook for Yen
We are still interested in the short side of the yen and would look for the next level of resistance.
There is heavy resistance at the 8800 level on weekly and daily charts.
We would expect the rally to fail into this area and will look for confirmation from a stochastic crossover with bearish divergence.
This will if we can get it give us clear stop point and with price momentum on our side a target of the lows.
Even if were wrong this trade if the set up comes to fruition will give us low risk and high reward.
Money management is all about keeping risk low and profit potential high.
If you learn to wait for confirmation rather than jumping to soon you will have the odds on your side.