Much of the time the trading articles I write are focused on where to enter a position more than any other topic. This is because it’s the most important part of the trade. If you can’t get your entry correct, meaning low risk, high reward and high probability, the other components to your trades such as the exit and management will not work. Today I want to focus on a simple yet powerful technique related to how you exit positions that should help you increase your winning percentage. To explain this, let’s look at a recent trade from the Mastermind Community Supply/Demand grid.
Profit Zone
In short, your profit zone is the distance from your entry to your target. So in the example below, the profit zone is the distance from the short entry (supply) to the demand level below, which would be our target. The black line on the bottom of the chart is the origin of the rally (demand) that brought price up to supply for our short entry. Many would take that demand area as their target, thinking, sell short at supply and buy back for a profit at demand.
NASDAQ 1/07/16
Profitable Thinking
Demand, as we know, is a price level where there is competition to buy. So, if we buy where others are looking to buy we are going to have to compete with them at that level which makes getting filled difficult. So, if we know there is competition to buy at demand that is the last place we want to buy. If we want a much easier time getting our buy order filled, we need to buy before price reaches the area of demand. Instead of buying back our position at the black line (demand area); buying back at the blue line (circled area) will give us a much easier and better chance at getting filled. Another way to say this… Instead of buying when there is competition to buy, buy back for your profit when there is still competition to sell. While you will often miss out on a little profit, that’s ok. You are giving that up for trading opportunities with a stronger probability of success.
The Tip
If you have been reading my articles for a while, nothing I have said so far is brand new information. Let’s get to some of that now. For all our short term and long term trading opportunities, one component that must be present is an ideal/risk reward. No matter how many Odds Enhancers are present, the risk/reward must be there. To help define this for the purposes of this article, when we say 3:1, we mean risking 1 to potentially make 3. Furthermore, the “1” is the distance from entry to your protective stop and the “3” is the distance from your supply/demand level to the nearest opposing supply/demand level. However, given the information we discussed above on competition and how it relates to the probability of getting filled, we have an opportunity to increase our odds of a profitable trade.
If you are looking for trading opportunities that offer you 3:1, make sure the chart is offering you at least 4:1. If you are looking for 4:1, make sure the chart is offering you at least 5:1 and so on. If you want to increase your winning percentage even more, try this… If you are looking for 3:1, make sure the chart is offering 5:1.
I employ this concept on most trading opportunities I find and take. Most people who find 3:1 on a chart set their trade up to take action at 3:1, I don’t. Instead, I would make sure the chart was offering at least 4:1 and then take profit at 3:1 or pass on the opportunity.
Of course, to do this objectively you must be able to qualify and quantify real demand and supply in any and all markets with a very high degree of accuracy. All the information you need to do this is clearly seen on a price chart if you know what you’re looking for.
Hope this was helpful, have a great day.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Editors’ Picks
AUD/USD trades with mild positive bias near 0.6700, RBA Meeting Minutes eyed
The AUD/USD trades with a mild positive bias near 0.6695 during the early Asian session on Monday. The weaker US Dollar provides some support to the pair. The Fed’s Bostic, Barr, Waller, Jefferson, and Mester are set to speak on Monday.
EUR/USD: Could FOMC Minutes provide fresh clues?
The EUR/USD pair advanced for a fourth consecutive week, comfortably trading around 1.0860 ahead of the close. Progress had been shallow, as the pair is up roughly 250 pips from the year low of 1.0600 posted mid-April.
Gold looks to extend uptrend once it confirms $2,400 as support
Gold price continued to push higher last week and rose above $2,400 on Friday, gaining nearly 2% for the week. Investors will continue to scrutinize comments from Fed officials this week and look for fresh hints on the timing of the policy pivot in the minutes of the April 30-May 1 meeting.
AI tokens could really ahead of Nvidia earnings
Native cryptocurrencies of several blockchain projects using Artificial Intelligence could register gains in the coming week as the market prepares for NVIDIA earnings report.
Week ahead: Flash PMIs, UK and Japan CPIs in focus. RBNZ to hold rates
After cool US CPI, attention shifts to UK and Japanese inflation. Flash PMIs will be watched too amid signs of a rebound in Europe. Fed to stay in the spotlight as plethora of speakers, minutes on tap.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
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.