So how can we can avoid this and more importantly what can you do yourself to work the right time to exit the trade. So let’s, for example, say your trade is moving in an uptrend and the market is making higher highs, higher lows. It’s above the moving average, we’re also above the storyteller and everything’s going good.
Then all of a sudden we get a retracement. What do I mean by a retracement? Well, this is when the market hits a little high and then it falls back to around the level (lowest arrow) in the picture below and we get to a low.
This is a market making higher highs and higher lows, so in a nice uptrend, and then we get a break for a retracement down. Our traffic light PTS system is super simple; as soon as you see a color change going from yellow then red, red, red, red, red, at the first green candle you’re supposed to take the long trade.
Now this is not a simple decision. There are a few schools of thought in deciding where to play your Stop Loss. I often prefer to use previous wave lows as Stop Losses because it basically makes my risk to reward quite nice. So what do I mean by that? So if my entry is on that green candle then, as you can see below, this is where I’d place my Stop Loss.
Okay. That was on a 15 minute timeframe. Let’s have a look at something on an hourly timeframe.
I’m going to show you a few examples because there’s a lot of examples on this particular chart. Le me draw them all out for you here.
Let’s look at my favorite one in this chart, arrow 4; that’s the one that looks like the most obvious sell position. Now, again, if you’re selling at arrow 4, where are you going to put your Stop Loss? Are you going to use the wave high? Are you going to use the moving averages? What are you going to d? That’s the question you’ve got to ask yourself when you’re taking a trade.
Here’s another way of thinking about it. Every time the market makes a new wave, it makes a retracement. What goes down, must come up and vice versa. Effectively what you could do is measure the length of the retracements. So here you’ve got 60 points, the next one is 33 points, the next one 44 points and finally 46 points.
Now, where is your target? Remember I said that we would aim for at least 2-to-1 risk to reward. If that’s 30 points where we measured it to then we’re looking for 60 points on the downside and that’s around here and let’s put the candidate or achieves that right here, take the ruler out. And this is how the trade would look once it’s completed.
This example is a really nice and free flowing trend. It’s under the moving average and it’s below the zero line on our Storyteller as well. Plus there’s a lot of things that are looking bearish here to help you with this trade on the way down.
Okay. So that’s just a couple of quick examples but you should now have a pretty good feel for how to use your Stop Loss and how to manage your risk to reward on a trade. Remember, if you’re interested in any of our courses, please through for a bit more information on our website.
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