When technicians chart using point & figure charts, they are doing so to identify and stay in longer trends. We do not want to be shaken out too early on a trade that could have yielded much more profit. Therefore, we would want to make our signals less sensitive so we have fewer of them or we need to use some sort of filter so that we do not take every trade we happen to see.

We must have a trading plan or system designed around the use of our technical tools. In my previous articles on Point & Figure charting (Part 2), I told you the need for identifying your entry, stop and even projected target for the trade before entering it. Supply and demand levels work the same in point and figure as they do in other styles of charts. Look for an area where trend reversed strongly. Your typical rally-base-drop or drop-base-rally would do just fine. You should look to buy or sell when you receive entry signals in those areas only.

Stocks

One of the simplest filters is to make sure the trades we take meet the standard 3:1 reward to risk ratio we always follow in our classes. Since we know our entry, our stop and can use supply and demand or even the horizontal or vertical projections for our targets, there is no reason why you cannot take only the trades that offer the greatest potential for success and the lowest risk in relation to it.

Stocks

The overall trend of price is something we look at to determine whether we should be a buyer or a seller of a stock. Why should it be any different with P&F charts? The difference in drawing the trend lines is that they are traditionally only drawn at 45 degree angles from a low or from a top. You would not connect multiple lows for an uptrend or multiple tops for a downtrend as you would with candles.

Stocks

We can also limit our risk in trading by only trading with the trend. If you are above an uptrend from a low, you would only look to enter trades when you receive a buy signal. Use the selling signals to exit those longs only. You would not take a sell signal as an invitation to enter a short as it is counter trend and has a lower probability of working. The short positions should only be entered when you have a sell signal when you are trading below a trend line drawn from a high. You would use a buy signal to exit those shorts but not to enter longs.

Stocks

Breaking a previous column of X’s is a simple signal. So is breaking a previous column of O’s. I showed you some patterns that can be used as more advanced entry signals. There are many others. Some technicians will only enter trades on a complex signal and then exit upon receiving a simple signal. This will also serve to filter out a lot of unnecessary trades.

There are a lot of choices to screen out trades that are marginal. We want to trade smarter, not more. No matter what system you create, be sure that it manages your risk properly and offers you the opportunity to identify and take high probability, low risk trades. There are plenty of them in the markets waiting for you.

Learn to Trade Now

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Education feed

Editors’ Picks

EUR/USD battles 1.1900 amid buoyant risk appetite

EUR/USD is off the two-week highs, battling 1.19, as coronavirus vaccine optimism and easing US political uncertainty keeps risk assets better bid and the safe-haven dollar under pressure. Volatility may rise later Wednesday with the release of crucial US data.

EUR/USD News

GBP/USD drops below 1.3350 amid Brexit woes, eyes on Sunak

GBP/USD extends the drop below 1.3350 ahead of Wednesday’s London open. A lack of major data/events, as well as mixed clues for Brexit, weigh on the spot. UK’s Autumn Forecast Statement, US GDP and FOMC minutes in focus.

GBP/USD News

USD/JPY hovers around 104.50 amid positive T-yields, S&P 500 futures

USD/JPY selling stalls, but not out of the woods yet. The bears take a breather after the 30-pips drop seen Tuesday. Gains in S&P 500 futures, Treasury yields save the day for the bulls. Risk-on flows to keep DXY undermined ahead of US data dump.

USD/JPY News

Editors’ Picks

EUR/USD battles 1.1900 amid buoyant risk appetite

EUR/USD is off the two-week highs, battling 1.19, as coronavirus vaccine optimism and easing US political uncertainty keeps risk assets better bid and the safe-haven dollar under pressure. Volatility may rise later Wednesday with the release of crucial US data.

EUR/USD News

GBP/USD drops below 1.3350 amid Brexit woes, eyes on Sunak

GBP/USD extends the drop below 1.3350 ahead of Wednesday’s London open. A lack of major data/events, as well as mixed clues for Brexit, weigh on the spot. UK’s Autumn Forecast Statement, US GDP and FOMC minutes in focus.

GBP/USD News

USD/JPY hovers around 104.50 amid positive T-yields, S&P 500 futures

USD/JPY selling stalls, but not out of the woods yet. The bears take a breather after the 30-pips drop seen Tuesday. Gains in S&P 500 futures, Treasury yields save the day for the bulls. Risk-on flows to keep DXY undermined ahead of US data dump.

USD/JPY News

Bitcoin price majestically rockets past $18,000 as $20,000 beckons

Bitcoin rally is in full swing as investors anticipate a final leg up to $20,000. The flagship cryptocurrency has in the last couple of weeks broken key barriers to top $18,000 on Wednesday towards the end of the Asian session.

Read more

Gold: Nears the 200-day SMA support

Gold is trading quite close to the widely-followed 200-day Simple Moving Average (SMA) of $1,797. The safe-haven metal is about to test the long-term SMA for the first time since March. A break below that support cannot be ruled out.

Gold news

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology