Plan Your Trade and Trade Your Plan
Hello, traders. Welcome to the Price Action Course and the third module “Nailing Entries and Exits: Sniping For Levels”, and in this lesson we’re going to talk about how important it is to plan your trade and trade your plan. This is basically one of the most important things if you’re going to be trading with the Price Action Only kind of style because you are going to be focusing on levels, and you are going to be planning your trade whenever you read a rejection or a continuation of the trend, maybe a breakout of the structure or a balance of a supply or demand level. And you are going to also be sniping for exits, meaning that before you even place your trade, you will know where to place your stop-loss levels and where to place your take profit levels, meaning that you already have a set scenario for a risk-to-reward opportunity. If you don’t trade your plan and you exit sooner than your take profit, you might end up hurting yourself and hurting your system.
But let’s start with a little remembrance on what Price Action Traders do. Well, Price Action Traders focus on overall swings highs and lows in the market. And if you remember accurately, swings highs and lows give you market structure, which also give you levels to focus on. We rely on structure and levels to profit from our trading decisions. By being patient and waiting for price to hit these levels, we aim to reduce our risk and getting improved risk-to-reward scenarios. And here’s the key and most important aspect of this style of trading: you don’t close your winners early, and the reason is because if we do, we will be lowering our profit levels and maintaining the same risk level or stop-loss level. And this means that even though we eagerly closed our trade early, we are still going to maintain the same stop-loss levels, meaning that if we have a losing trade we are going to let our stop levels get hit and take us out on a loss. But if we have a winner trade, we are not going to let price take us out on our profit targets, meaning that our risk-to reward ratio will be much, much lower, which will mean that we will be completely ruining the great risk-to-reward opportunities that you can get from trading with this style and making your overall results hurt.
Taking profits too early can make our winning strategy become a losing one. And this is very simple, and there’s simple math behind this statement. Let’s say that you have a 1:2 risk-to-reward scenario on every trade, and you have a 50:50 system that you trade, meaning that 50% of your trades are winning trades and 50% of your trades are losing trades. On a 1:2 risk-to-reward ratio, this will always give you a profit in the long-term. But if you don’t let your profit take levels or your exit levels to be hit and if you take your profits too early, you’re going to diminish your 1:2 risk-to-reward ratio to a 1:1 or even worse, meaning that your system will not longer be a winning system in the long-term.
Now, we’re going to go to a US dollar-Japanese yen chart, and we are going to look at two trades, one trade might be currently open because we are still inside a structure and one trade that happened a couple of months ago. But we’re going to run two scenarios: the first scenario will be taking our profits too early, and the second scenario will be letting our targets get hit.
This is the US dollar-Japanese yen forward chart, and the first trade I want to discuss is not the trade that might be open right now, but this long opportunity right here. The first thing I’m going to draw is a simple zone that price clearly respected. Now, I´m going to use this high, which is the high of the move, and I’m going to use this lows right here, meaning that this is the overall support level that we were looking at when price fell to these levels. When you enter in such a strong down move…because this was, if I’m not mistaken, a 570 pip down move…we might want to get a better risk-to-reward opportunity by putting a limit order, meaning that if we wait… Well, we could have waited for the close of this candle, which could have been the same.
Price went all the way down here, and we forgot to put a pivotal level of course. Let’s put on the pivotal level right here, and let’s change the color and the width of this pivotal level so we can better see it. Let’s put on a black and a 2 point width. So this is our pivotal level. You can see that we will test it once, twice, three times. We broke and we re-tested it again. And we can also put another pivotal level right here at this lows, or at this highs right here, which are also the same lows that we are using for our overall support zone. When you see the [inaudible 06:33] rejecting the pivotal level and of course, the overall support zone…And of course, you were waiting for a strong reaction, maybe a 100 pip reaction, you go long. You can go long right here at the 116, and of course we have the 116-0 level, which is a very strong psychological level because it is a round number. So we go long right here. Let me put on a nice ellipse on where we got long, and we got long right here.
This is our entry level and we sniped it. This was another level to be looking at, but you can see the price broke with it. And we didn’t get any rejection out of it, so the next level to be looking at was this one. And we got the rejection and we got an entry. We sniped our entry right here, and then the first level that we wanted to look at for profit taking would have to have been this one right here. Why this one? Because you can see that we have a very strong resistance level that we [inaudible 07:48], that we tested and then we tested again and then we re-tested a support before continuing to this peak right here. So this is the first level to look at, and this would have given us a nice 200 pip win, 210 pip win, at this level.
If you see right here, you take the trade at the re-test and at the rejection of the support zone, and your stop lessons would have to go down here, below the support area, which would mean that you would have a 100 pip stop loss for 200 pip win, which gives you a 1:2 risk-to-reward ratio, which is very good. And what you can do here… This is the trade you plan. The trade you plan is to get long here with the 100 pip stop loss and to take your profits out at this very strong support zone. This could have been your first plan, and if you see, the plan worked and you took 200 pip out of it. But if you had let emotions mess with your decisions, you could have done this. Let me thicken this candles out for you, so you can better see what I’m talking about. You got long here, at the rejection and then you had a very nice [inaudible 09:37] engulfing candle. With a quite a long week to the upside but it engulfed at two various candles which means that we have a very strong reaction and right here at this [inaudible 09:51] engulfing candle, our trade has been confirmed, we are good to go. But then we get a very strong [inaudible 10:00]. Now, this is where some traders make the mistake of closing out too early, they get scared the price might continue to the downside and hit your stop loss levels. If price continues to the downside and hits your stop loss level, well, there’s nothing you can do about it and you just move along. But if you take your profits here, that would have meant that you only took 31 pips out of the possible 210 pips that this trade idea could have yield.
Giving you an overall risk-to-reward ratio of 3:1, meaning that you have risked three times what you made on the trade, and if you do this over and over and over again, you will transform a winning system into a losing one. And you could go even further, you can decide to only take partial profits here and let the rest run, but for the moment we are just looking at possible risk-to-reward ratios and how to plan your trade and trade your plan. And as you can see here, we took a nice 200 pips, and if you trade-in a single lot, that would mean that you would have made $2,000 on this trade right here.
Now, let’s continue and let’s go to this opportunity that we are at right now. Price came back to the same power by zone…I like to call this zones power-by’s because you can see that indeed we have a lot of buyers protecting the 116 level, and we decided to again go long after this decision candle and rejection candle. So we are risking here 106 pips, and we are trying to get, again, 200 pips out of the trade.
Now, the difference between this trade and this trade is that we are in a very nice down structure, meaning that we are making lower lows and lower highs and if you draw a trend line from this high to this low, you can see that we are actually broken with this down structure. This is where the structure analysis comes to play and it’s very important. You can see that we moved to the upside and we close above this down structure, which is actually just a down resistance. You can see that we get sellers every time price hits this down trend, but right here we closed it, we re-tested it, and we are moving higher.
When price brakes with this down structure, you can know for sure that your trade idea is in fact working, and you can take out your position with a limit order right here. Let me just -for a 209 pip win. You can see that just by playing the market structure, the power-by zones and choosing to wait and be patient for press to hit these zones, we’ll yield profits in the overall or in the long-term. But the thing about this trade is that this area was already broken with, and it has been re-tested once, twice, three times as support before it broke to the downside. So what you can do here is just try to wait and see if rise…and not to put a limit order right here, right below the area to get 209 pips out of it…but you can see and wait for price to hit this zone and see if you get a nice reaction to it or if you get a nice by through it and a continuation maybe too. This area right here, which is a previously tested area as resistance and as support, and if you wait for price to hit this zone, you might get an extra 100 pips out of your trade, meaning that you would have 1:3 risk-to-reward ratio on your hands.
And this is how you play levels and how patience and how planning your trade and trading your plan is going to make you profitable in the long term. And again, if price moves to the down zone and stops you out, well, right now, we would stop you out and break even. That’s fine, but if price would have just broken through after this reversal pattern and stopped you out at a loss, it’s fine again because you’re trading a system that is profitable in the long-term.