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Understanding Risk/Reward through Bitcoin's CME Futures Gaps

CME:BTC1!   Bitcoin CME Futures
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In this post, I will be explaining the concept of the Risk/Reward Ratio, also known as the RRR , and the significance of this idea when it comes to trading.
I will also be explaining how this can be applied to Bitcoin's CME Futures Chart on the daily, in regards to gaps.

Analysis
- To begin with, Bitcoin's CME Futures chart shows a huge gap leading down to 9.6k
- Unfortunately, this gap is yet to be filled.
- Given that 99% of gaps that have been created get filled some time in the future, it's likely that this gap will fill as well
- However, solely approaching the chart from the perspective of gaps has its limitations
- For instance, the gap at 11.4k took almost a year to fill.
- As such, gaps don't provide us with a specified time frame as a reference

- Should we fill the gap right now, and bounce at gap support, that would be a 7% move downwards from the current price
- Should we see a stronger bearish price movement that extends below the price gap, we could see a 15% move downwards based on support levels
- The gap support at 8.8k converges with the descending trend line support on the weekly, as well as the 0.5 Fibonacci retracement support (refer to our previous analysis)
- As such, it's reasonable to conclude that a bearish price movement over 15% is less probable.

- On the bright side, it's also important to note that there are some gaps above the current price, indicating potentiality for bullishness
- There is a wide gap at 10.5k levels, and another one at 11.4k

- Given this information, we can estimate our risk/reward when entering a position at current levels
- Splitting our entries into three different levels, we can:
1. Enter at the current price of 10.2k
2. Dollar Cost Average ( DCA ) at the 0.382 Fibonacci retracement support at 9.4k
3. Enter at gap support around 8.8k

- This way, we know that our risk is limited, and that the upside remains huge, due to the overall trend being bullish .
- Based on significant support and resistance levels, a trader would then calculate his stop loss target and take profit targets according to his risk appetite.

Conclusion
The trend is your friend. While the short term trend may appear bullish , it could be said that the overall trend for the long term remains bullish . As such, it would be better to look for spot/long entries near support.

Don't predict the market. Take it by levels, and play by probabilities.

- Michael Wang-

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