HOW TO SET PROPER TAKE PROFITS AND STOP LOSSES 🧙‍♂️
Knowing patterns is one thing and using them to the fullest potential is another. Above, we've depicted 3 major patterns commonly used by traders during a technical analysis (wedges and pennants will be covered next week). We all know how to notice them on the charts and general shapes. However, a lot of traders don't know how to act once they notice these patterns and we're here to clarify that.
First, let's look at the proper entry points for these patterns. A general rule of thumb would be to enter the trade at the neckline once we get a closure below/above it. This way we can increase the probability of a trade and make sure the pattern is still valid. What about the take profit? Well, from tons of observations by a lot of talented traders there is a theory that the move following these patterns would be:
1) Double TOP/BOTTOM: the same as the distance from the neckline to the top or bottom
2) Head and Shoulders: the same as the distance from the neckline to the head
3)Rectangle: the same as the range of the rectangle
This way we can maximize our profits made from the trades based on these patterns.
Lastly, let's look at the Stop Losses for our trades. This one really depends on your trading style. More conservative traders (for instance, we like to keep our SLs tight as possible) would go with the mid-range of the pattern ensuring at least a 1:2+ Risk-Reward Ratio. However, if you're using this pattern as an indication that the price will follow further than the expected TP1, you may as well slightly increase your stop loss (not advised).
This is pretty much what you have to do once you notice one of the patterns above and you want to capitalize on the opportunity. Safe trades and stay tuned for more posts!
Ah also, it's Investroy's birthday this weekend, so if you have time, stop by and wish the HAPPY BIRTHDAY to the team :)
First, let's look at the proper entry points for these patterns. A general rule of thumb would be to enter the trade at the neckline once we get a closure below/above it. This way we can increase the probability of a trade and make sure the pattern is still valid. What about the take profit? Well, from tons of observations by a lot of talented traders there is a theory that the move following these patterns would be:
1) Double TOP/BOTTOM: the same as the distance from the neckline to the top or bottom
2) Head and Shoulders: the same as the distance from the neckline to the head
3)Rectangle: the same as the range of the rectangle
This way we can maximize our profits made from the trades based on these patterns.
Lastly, let's look at the Stop Losses for our trades. This one really depends on your trading style. More conservative traders (for instance, we like to keep our SLs tight as possible) would go with the mid-range of the pattern ensuring at least a 1:2+ Risk-Reward Ratio. However, if you're using this pattern as an indication that the price will follow further than the expected TP1, you may as well slightly increase your stop loss (not advised).
This is pretty much what you have to do once you notice one of the patterns above and you want to capitalize on the opportunity. Safe trades and stay tuned for more posts!
Ah also, it's Investroy's birthday this weekend, so if you have time, stop by and wish the HAPPY BIRTHDAY to the team :)