Trade risk reward?

A number of emails arrived over the past few weeks regarding trading risks and profit taking and how to find a suitable method to use. Some of you quoted very good entries and very poor targets, other had early entries, good targets but are getting stopped out.

Every trader has to develop their own method because there are no rules to how much risk you can take and how much profit you want. Clearly your risk must be determined by how well funded you are and how much of your capital you will risk per trade including the funds necessary to withstand pull backs and spikes. The profit you want is rarely feasible and many traders want to try and get daily moves on a 5 minute time frame. This is neither reality or practical. You must trade with risk and a reasonable target in order for profits to reflect your trading style. If trading the 5 minute chart, you are better looking for 5 minute target areas for profit and not a 1 hour or higher time frame target.

The logical thing is target an obvious price area on the time frame for profit before you enter, and also place your stop on the same time frame where it is probable to hold and offer support, if going long).

Some of you asked about using a risk reward ratio as a trading method. I am not against the concept, I just dont use it and a few charts will show why. They also show my approach nets higher profits, its all rather simplistic which is how it should be.

A look at Doc's secret indicator hidden from you for a long time. Nah, just kidding.

This is a zoomed out view of a daily chart and the rats nest of lines are there to show you a few places where price reacted in the past and how we can use these areas for future trading opportunities. The blue lines are the edges of price turning.....but as I have said many time before, the market wont turn on an exact point or pixel on your screen no matter how much you see it appear to do it. Remove the black lines and learn to spot the blue lines without the need to draw any of this, I dont, and all is done by eye in a matter of seconds per time frame.

This is the same time frame with a closer in view. Highlighted in blue are the edges of historic price action and the grey box is there to let you know that it is an area and not a point or pixel. Always note how price move away from an area, is it fast or a slow build up. Both have significance and there is nothing to say a fast move is the best or the only one to choose. There are times where positioning takes longer and price can be supported, you have to read other time frames to see this and see where the money is flowing, bullish or bearish and also if its a major market time and have active players.

If you were short this time frame, can you see where obvious targets exist?
 

4hr chart. Can you now spot the target(s)?

4hr chart again, this time zoomed out. Now see spoon feeding in progress, keep an eye on the bigger picture and if needs be adjust your charts so you can see these areas before to arrive and watch how price behaves when it gets close. As price drops lower it attracts more of the herd and any recent herd longs will be stopped out because few will see the bigger picture for what its saying. As price heads ever lower, pro buyers will be lurking and dont give back what profit you have made, either have multiple targets and take a piece out of the market on each target and not necessarily go for the big hit each time, that is greed and it will burn you eventually.

Daily on gold and even though I changed instrument the principles are the same.

Upper blue line is the upper edge of historic price action where it proved traders were active. Lower black line has the same purpose. The middle black line is nearer term price action history. All of this makes sense once you can join time frames, price action and history together. This chart is the bigger picture for this final part.

4hr chart. A little closer in on the action and see how well price has turned at these old price areas. So far this chart shows little interest in taking more longs. It is this long picture that you really need to develop the utmost patience in allowing it to go through the cycles.

4hr again show with the two different trading methods to taking profits.

Lets assume your entry is the second black line down and your stop is above and the stop loss amount is within your risk. With a 2:1 risk reward your target is the purple line below and you can say was hit nicely. Here is the reason why I do not trade risk reward. Entry now is the same price, the target or targets are the green lines. Why?.....I trade from high to low and into areas where price reacted and not based on what math tells me, price knows nothing about a 2:1 or 4:1 risk reward. It is professional money who move the market and they know where the best places are to enter and exit and it makes sense to do the same when you see then move. I marked some of the possible targets, not all of them.

Spend enough time watching the charts and where the price turns and you will see there is no other method in my opinion that captures as much profit. We are trading close in with pro money and know the probable trade entries and exits ahead of time and can plan quality trading around that. All the magic of Fibonacci, trend analysis etc all falls short when you compare all of that to what I have described here. All of this has been proven since the markets began and nothing has changed since.

If you do nothing only look for these sensible targets and not be greedy an account will grow nicely and with low risk.

The easiest thing to do is enter the market and the hardest thing is getting out. But if you know where to enter and know where the take profit and have a stop set, you either win or take a loss. All you need do is prove to yourself that your trading has improved to where it makes you real money. Best of all, none of this need cost you a penny while you learn.