“Let it center before you enter!”
I know a Forex trader who always said this phrase and it makes good sense. The market is always “floating”, consolidating, going up and down wildly…
The concept of waiting for a retracement and getting a discount is quite powerful: each 1 pip added to the reward and subtracted from risk significantly changes the reward to risk (R:R) balance. Here’s why:
- Let’s say that I originally aim for a 50 pip target with a 60 pip stop loss
- The Reward to Risk (R:R) is then 0.83 (50/60)
- But due to 15 pip retracement I am now aiming for a 65 pip target with a 45 pip stop loss
- The “new” R:R is 1.44
- This is a 67% (!) better performance
- Nathan explains more details on this idea in this video (pending orders have the same benefit for R:R as retracements do)
Another rule of thumb is to find an entry spot, but then WAIT one more bar before actually entering a trade. The idea is psychologically oriented:
- Many traders become excited or nervous when the moment of entering a trade is near
- They start to care less whether the trade is part of their plan and are able to take a trade on the whim of emotions
- Waiting for the “1 more candle” technique (after a trader has already decided to enter) helps keep the head clear and helps avoid incorrect trades
- It forces the trader to have extra patience, something that many lack
- And regularly the concept gives you a better discount OR occasionally it shows us that a trade setup was horrible in the first place
- In the unlucky moments that the currency pair accelerates away from our entry moment in favor of our trade idea, then we can still try to place a pending order at the original level.
What do you think of these 2 rules? Do you use the “let it center before you enter” rule? What do you think of the time rule of waiting for 1 bar?
I can use the above concepts on a real life practical example of today’s market. The GBPAUD for instance has retraced down deeply (orange arrow) and eventually bounced off of a broken resistance trend line. The bullish pinbar (green arrow) was followed by a small bearish candle (retracing the pinbar candle) and today’s candle is strongly bullish (so far).
Does it make sense to take a long right here right now?
The answers will vary widely depending on who you ask. I think that waiting is the optimal decision:
- Let today’s daily candle close
- If the close is near the high, then bulls remained in control
- Use the “let it center before you enter” rule
- Take a long at half-way of the daily candle with stop loss below the candle low
The above is an example: in other cases you might not want to wait for a 50% pullback, but you would be ok with taking the trade at a smaller pullback.
Thanks for sharing and wish you Happy Hunting!
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