While I was watching XOM yeaterday to see if it was going to make a bid for the bottom of the broken wedge, at 77.01, I noticed that Goldman had just put in Data Point #4 of a Symmetrical Triangle, after its parabolic run-up late Thursday afternoon. That pattern "should be" a bullish continuation pattern after a power move like that on some volume.
I entered the trade at 95.45 with a mental stop at "something" below 95.00 (Data Point #2) to allow for a morph into a Bull Flag, but I wasn't going to give it very much room on the downside if it looked like it was going to do more than form a Bull Flag. Those moves have to be watched carefully so that the trade doesn't run away from us on the downside. Once I entered the trade, I moved to the 1-Minute chart.
Goldman got back up to the top of the Symmetrical Triangle at Data Point #5 (#5 in the first chart) and temporized there for a bit on low volume. At that point, I wasn't interested in seeing anything below 95.00, so my risk on the trade was $0.46, or a little more on whatever they gave me on a market order to sell at $94.99, which was a penny below the 95.00 low of the pattern at Data Point #2 on the first chart.
That's the risk. Now, what's my potential reward on the trade?
The highs of the pattern were 96.25...96.20...96.15. I always use the more/most conservative of my choices in establishing a target in an effort not to be overly ambitious about it. Most traders probably would use the 96.25 high, which is perfectly fine, of course.
96.15 - The most conservative of the three highs
95.00 - The low of the pattern
96.15 - 95.00 = 1.15 points of upside on a breakout
96.15 + 1.15 points = Target: 97.30 IN PLAY
From my 95.45 entry, the reward if the 97.30 target gets MADE is $1.85, so the risk:reward...lose $0.46 vs. gain $1.85...is 1:4, which is quite nice. If we consistently structured trades that have a 1:4 risk:reward ratio, we can win only ONE time (gain $1.85) and lose FOUR times (lose $0.46 four times), win only 20% of our trades, and do no worse than a break even. It isn't likely that we'll win only 20% of our trades if we're being disciplined about following patterns and employing proper stops, but that dramatic example illustrates the value and importance of managing risk, and of structuring trades that are stacked in our favor. I view it as a business deal that should executed in an unemotional, disciplined, business-like manner. But, like everyone else, I forget to DO THAT, and get sloppy with my trading. LOL.
The trade went well. When the 97.30 target got MADE, I hit the "sell buzzer" (LOL) on a market order. Goldman was pumping higher, so I did a little better than the 97.30 target, selling into strength.
NOTE: If I had used the 97.25 high to establish the target, that would have put 97.50 IN PLAY, which also MADE, but as I said, I prefer to be conservative about establishing targets.
Happy Valentine's Day to everyone!
2 comments:
awesome trade, Melf. very helpful to read about your analysis and risk/reward calculations!
Happy Valentine's Day to you too!
Thank you, Greg. We can't possibly know for sure what the market is going to do, but we can know for sure what we're going to do about it by structuring good risk/reward trades and managing our risk, in general. When we do that, we even can have more losing trades than winning ones, and still come ahead.
I've been enjoying your exchanges with Kemal on E-wave at xtrends. I have only a rudimentary understanding of the basics, but it's been interesting. Thank you. I hope that you're having a great weekend.
Post a Comment