Picking Entries, Stops and Targets

 

Video Transcription:

Hey, traders. Welcome to Video 10 of the Forex Beginners Course. This is
Cory Mitchell, and in this video, we’re looking at an introduction to
picking entries, stops, and targets brought to you by Investoo.com.

So when we looked at position size in the last video that should be always
be in the back of your mind when you’re picking your entries and your
stops. Your maximum risk, you need to know that, because that helps
determine if you can actually take that trade. You entry and stop is going
to be too far apart and you have a small account, you may not be able to
even take that trade, because you can’t take even the minimum position size
in order to be within your maximum risk tolerance. So always keep position
size in the back of your mind.

For your stops, if you are right on your assessment, your stop needs to be
out of reach in normal market fluctuations. So typically, this is going to
be tucked behind a recent high or low. So if you’re going short or selling,
you’re going to tuck that stop behind a recent high. If you’re buying,
you’re going to tuck it behind a recent low. If you enter too far away from
a recent high or low, you’re stop is going to be too large and that makes
it difficult to find a target that will adequately compensate you for your
risk.

So the larger the stop is, since we want to try to make more on our winners
than we do on our losers, the bigger that stop is, the harder it becomes to
make that profit. So it’s very easy to say, well, I want to make that five
to one, but if your stop is 200 pips, that means you need to make a
thousand pips. A thousand pips moves don’t happen that often, especially
not just running in one direction. Normally it’s very hard to make that, so
the larger your stop is, the tougher it is to be compensated accurately for
your risk. So a smaller stop is better.

We’ll look at how we can do that when we look at some examples. The better
your entry point, the smaller your risk, and the easier it is to make
multiple times risks. That’s what we just discussed. Your winning trades,
you want to make more on them, so we want to try to keep that risk as small
as possible, but without exposing ourselves to the risk of just being
stopped out prematurely. So there is a balance here of placing a stop just
far enough that it’s out of reach of a typical market movement, but also
not so small that it very easy to get stopped though.

So at the minimum your target should be 1.5 times your risk. Five times
your risk is better, but not always feasible. So we want to be realistic.
So assuming conditions stay similar to what they are now, what’s a
reasonable target? This is what you should be asking yourselves as you
trade, and we’re going to go through a couple of scenarios.

I personally don’t get greedy. I usually take a profit at 1.6 times the
risk, and if the market is trending, then I’ll get out a portion of 1.6,
2.6, and 3.6 times whatever. So what that means is if I take a trade at my
stop, so I’m willing to risk 10 pips on that trade, I’m going to get out a
third of my position approximately at 16 pips profit, so that’s 1.6 times
my risk. I’m going to get out another portion of my position at 26 pips
profit, so that’s 2.6 times my risk, and I’m going to get out of the rest
of the trade at 3.6 times my risk, so 36 pips, because my stops 10 pips so
I’m getting out at 3.6 times my risk.

That way no matter what my stop level is, I’m always being compensated for
the risk I’m taking. Taking three or four such trades like that is a better
alternative than just always trying to find the homerun trade, where you
are trying to make 10 to 1 on it. It’s going to be very hard to make 10 to
1 on a trade. I’m not saying it can’t happen, but most of the time when you
look at the forex market, your eyes are going to gravitate towards that one
that you could have made 10 to 1 on, but if you actually look, the forex
market is very choppy.

It moves forward and then swings almost all the way back, then moves
forward again, and then moves almost all the way back. So being able to
trade, take more trades like this is going to allow you to capture probably
more money than you would if you just go for that homerun which is going to
be hard to find.

So here are some general guidelines for your entry stops and targets. For
your entries, the price always moves in waves. So you have a wave up and
then it pulls back, and then you have another wave up and it pulls back,
then a wave up, then maybe a down trend starts or a range, so you’ll see
waves move to the side, or it will move down, pull back, move down again.
So we have the price moving in these waves. Getting in on a wave in the
trending direction is better than getting in later. So getting in early is
better than later.

We don’t chase the price. This only decreases your potential reward and
increases your risk. So if the price is running, you want to get long, we
just had a pullback, and now the price is surging higher. The longer you
wait, the more you sort of chase the price up, so maybe you don’t want to
buy at the current price, so you keep pushing your limit order up to try to
catch it. That’s called chasing price. All you’re doing is decreasing your
potential reward and increasing your risk. So we don’t chase price.

We either get the price we want, or we don’t take the trade. Trade with the
trend or the market structure so that you are [inaudible 05:57] those
waves. If you have an uptrend, the waves are going to be moving higher, so
you have a wave up and a smaller pullback, then another wave higher. We
want to be trading with those waves in the trending direction.

So after a pullback once the price starts to move back up, we can put our
buy order out and put a stop just below the recent low. For the stop, if
you’ve got a decent entry, tuck behind the recent high or low as I just
said. So if the trend is up, you get into that trade, you put it below the
recent low. If the trend is down, once the down wave starts again, get into
a short position and put in a stop just above the recent high.

We’re going to put that stop five pips behind for a swing trading, and only
a couple pips for day trading. So if you’re trading on a one or two minute
chart, you’re probably just going to tuck it behind by a pip or two. But if
you’re swing trading, and you’re on an hourly chart or a four hour chart,
put it five pipes behind, and also you want to consider the spread.

So only for short positions, remember your price on your chart only
reflects the bid price, so you’re going to add you’re spread to that. So
I’ll show you what I mean by that when we look at an example. So one of the
easiest targets is to take multiple times your risk, so whatever your risk
is, just set out a target at 1.6 or 2.6 times your risk.

I think this is probably the best method for new traders. I’ve been trading
for more than a decade, and this is still the method I use. I believe in
it, and it makes it very easy to always assure that you’re making more on
your winners than on your losers.

Make sure the trend is in your direction if you go larger than 1.6. So as I
mentioned, we go 1.6, 2.6, 3.6, you can alter those a little bit if you
want. But I’ll only look to get out at 1.6 if there is no trend. If there
is a strong trend in my direction, then I’ll look to scale out and some out
at 1.6, some out at 2.6, and some out at 3.6, but only if there is a trend,
because if there is no trend, it becomes harder to get those bigger gains,
the 3.6, for example.

So check to make sure the price actually has room to reach that target. If
the target is beyond a level that hasn’t been reached in multiple attempts,
you target is too far. So let’s say the Euro USD has been moving up, but it
keeps bumping into, let’s just make up a number, 1.50, it moves out, and
then it just keeps bumping against it, and can’t move. And you decide to
put a target beyond that at 1.51. Well, yes, it is possible that the price
could break out, but typically, as a trader, it’s not our job to assume
that. If that happens, we can trade it, but if you’re taking a trade below,
say at 1.49, and you just want to make a little profit in the meantime
before it hits 1.50, don’t put your target beyond 1.50.

We can’t just assume that because we got into a position, the market
behavior is going to change. So if you can’t get a trade on your terms,
don’t take it. It you can’t get the price that you want and say you can
control your risk that you want, don’t take the trade, there are so many
opportunities, that you don’t mean to take the crappy ones. So don’t worry
about missing a trade, just because maybe it didn’t pull back far enough or
something. I miss trades all of the time, and it’s fine, because it pays
off. The ones that you chase are normally the ones that are going to end up
hurting you.

So let’s look at a couple of examples. Let’s look at this one first. So
here is the USD CAD. I’m looking at a one-hour chart. This would be more of
a swing-trade type. On an hourly chart, you’re going to have a trade
lasting several hours to potentially several days.

So we’re talking about when I say take your trade once the price starts to
move back in the trending direction. So here we can see a nice strong move
down. We’re in an uptrend here, overall the wave’s higher, higher highs,
higher lows, higher high. But then we move down here and then we make this
lower low which takes out these former lows, so now we are in a potential
downtrend.

We’ll have this pull back up. It will move lower. The price stalls out
right here. This is a nice potential short trade. We’re moving with the
overall direction of the market. We have a little pause at the top here,
and then the price breaks below that little pause. So that is what I mean
by taking a trade once the wave starts moving back into your direction. So
once this red bar occurs, the price is now moving back into our direction.
So if we’re expecting the price to move lower, this is our first indication
that it is going to do so. So you can see, because it drops below these
prior green bars.

So this would be an example of a potential entry. This is one of the
methods that I use; it doesn’t necessarily mean that you have to. So we
would look to enter short just before these prior bars or this little
pause. We’ll be going short right about here just below where I’ve drawn
that box.

So I have my crosshairs, and so if I right click and drag, you can see some
little numbers pop up. So what that middle number means, we have 2, then
83, and then the current price, 1.09407 or the price that my cursor is on.
So what that middle number means, the 83, that means 83 or 8.3 pips. So
you’ve got to put the decimal point in. So that means 8.3 pips.

So that means to that high, let’s put it there, 8.7 pips, so that’s my
potential stop. But we need to add some pips. For one, this is one, we’re
going short, so we need to add the spread. So we’re [inaudible 12:38] my
spread, and this is typically about a pip. So that means we need to put it
to at least 9.7, that’s right about there, then we need to add 5 pips
again.

So we’re looking at adding 5 pips to 9.7, so we’re looking at 14.7 pips,
and that is where we would put our stop. So that puts it, let’s say this
drops again and then wiggles around a bit here, that gives us a bit of room
so that we don’t get stopped out before this down low occurs that we are
expecting.

If I take 14.7 pips times 1.6 which is just one of the methods I use for
always making sure that my profit is bigger than my risk, we end up with
23.5 pips, so that would put our target down in this area. So from our
entry point which is right below this box, measure down 23.5 pips, and so
it would be right about there. It’s right about there.

We can see it at the distance from here, 23 pips whereas the distance to
our stop, that would be up a little further, 14.7 pips. Our profit is
bigger than our loss. This is made possible simply by making sure that
we’re getting in near that high. What happens if we wait too long to get
into this, is that a risk becomes much larger, so now we’re looking at 25
pips.

To make 25 pips times 1.6 in this case, it probably would have worked out,
because we were in a nice down trend, but it does become harder. So we’re
looking at about a 25 pip risk. I think for about a 40 pip target, it
wouldn’t have made it there. We would have had to hold through this
pullback, still wouldn’t have made it there. We would have had to hold
through that pullback, and then finally, we get out here.

So the bigger that stop is, the longer the trade is going to take to hit
the bigger target. So if you could take, I had this one worked off before.
This trade is favorable to this trade, so let’s zoom in here to look at
that one.

So you can see this box is bigger. So we have sort of a pause here again.
We have a pullback. We’re expecting another down move because we have this
lower low. Now if this drops out the bottom, we’re expecting the price to
move lower again.

So once we drop below this former green bar, we can take a short position
right here below the box again, place a stop and the spread, plus five pips
above, which would give us some 16 plus 1.17, we’re looking at about a 23
pip stop or a stop would be up here. Let’s set this round to 24 pips times
1.6, which gives us a 38.4 pip target. That one we would have got out over
here.

So slightly a bigger profit, but we also got into the trade earlier and
it’s taking us longer to get out. So this trade took us, if we get in here,
we can see we’re out the same day. This one would have taken almost a
weekend plus two days to get out of. So for the small amount of extra gain,
this trade is preferable just because we have a bit smaller stock, which
means when we multiply it by whatever method we’re using, I use the 1.6.
It’s much easier to get out of just because that target is a bit smaller.
So stop, remember, check behind. If you’re going short, it’s going to be
tucked behind five pips above plus whatever your spread is.

On a long trade, so we have an uptrend here, let’s just say that you saw
this little false breakout here and decided to go long once this price
popped up, you would place your stop five pips below the last low, so a
recent low here. You are entering right here. That’s not going to stay
there for me, but you’re entering right as the price cross is above this
red bar.

So basically at your first indication that this little sideway move is
likely over, and we start to trend higher, so from there we’re five pips
off the low. Okay, so that should be about five pips there. We do not need
to add the spread because the price is reflecting our bid price.

So when it comes down here, this is an accurate number. We don’t have to
worry about the spread or anything like that. So when we’re going long,
just five pips below the last low. We don’t have to worry about the spread.
So in that case, if we go along here, we are looking at a 15.1 pip risk, so
a 24.1 or 24.2 pip target, and that would have been hit not in this round,
we would have had to hold it through that pullback, and we would have got
out right about there, 24.2 pips. So once again, our profit is lower than
our risk is what we want. If we wanted to continue to ride this, we could
have gotten long, and got out at 2.6 times the risk. So we’re looking at
15.1 pip risk times 2.6 which would give us a 39.2 pip target.

Potentially got out there, actually yes, we would have, 39.3 very close.
Otherwise, we might have had this little pullback, and then we would have
got out on this bar here at 39.2 and we could continue to do that if we
wanted to continue to ride this trend. We could have gotten out another
portion of our position at 3.6 which we may not have gotten 15.1 times 3.6,
54.34, 54.5, we may have just gotten out there, and if we didn’t out at
this one would have just gotten out right at the top of that move.

Then we enter into this down trend, and we have the trades we discussed. So
to stop, always tuck behind. If you want to, you can move it up, so once
you get out of this trade, you can move it to the most recent low. And once
you’re out of that trade, move it to the more recent one again, once you’re
out of this trade, you shouldn’t have any positions left, so you would be
out, but if you did, you can move it to just below the most recent low
there again.

And if you had any additional trades, then you would have been stopped out
as the price moves below this last low and your stop price. So that’s what
we call a trailing stop where you’re moving it up behind the price as it
moves in your favor. The main thing is though, let your winners be bigger
than your losers. That is the main thing, and look to enter on the first
sign.

You don’t need to wait for a ton of confirmations. I prefer to get in
early, because it’s going to be much easier to get your targets if your
stops 10 pips as opposed to 30 pips, because on a 10 pip that means that
you can get out your first profit at 16 pips, whereas if you wait to get
into your stops 30 pips, that means you need to wait for a 48 pip move in
your favor before you get your first position out.

So I’ll generally act as soon as I get some move in my direction, and once
you get better, you can also look to anticipate your entry price. So
instead of waiting for this up here, if I know I want to get long, I may
just try to get long at the bottom of this range here and tuck a stop just
behind this low, so it will even decrease my risk even more and make my
target price easier to hit.

So I’ll probably get out on this wave instead of having to wait for this
one. So that’s a little bit more advanced concept, but you can learn to
anticipate where you want to get in so instead of waiting, you’re just
going to jump right in with a small stop on it. So remember, if you can’t
get the trade on your terms, don’t take it. If the price runs too far
before you can get in or the trade is just too big to really bother as I
showed, this type of trade is better than this type where the risk is
smaller compared to this one where the risk is bigger.

So always take that one. If you have the option between two trades is take
the one with the smaller risk, because it’s going to easier to get out and
make a profit on, and you can take more of them, because you’re going to be
out of this trade quicker.

So when you get opportunities, don’t bother taking the crappy ones. Until
next time, happy trading.

Comments are closed.