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.

- 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.

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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