Is trading risky. Yes. So is driving a car, or any business endeavor.
However, with the right training, a clear plan of where you are going and how to get there, and some risk management and insurance, the risk is acceptable compared to the reward.
Here's a simple, classic, real-time case of a high reward low risk trading plan for a forex pair approaching a very good entry point.
Look at the below chart.
USD/CAD Daily AVA FX Chart (21 dec 28)
A Chance to Enter At Triple Support
We like our entry points to be as close to strong support/resistance levels as possible, because if the trade goes against us, we can place a stop loss very close to these, so when they get violated and hit our stop loss, we're out with a small loss compared to the potential gain. Here's an example:
The USD/CAD pair is testing a triple layered support at 1.0455. In addition to being strong price support tested over 12 times since October, there is also the 61.8 Fibonacci retracement level and the upper line of the declining channel.
Depending on one's view of where this pair is headed, the 1.0455 makes a good entry point :
· To Go Long on the Pair: You can place a stop loss 50 pips ( a typical daily move) below and if it gets hit you're out with a small loss. If the level holds, there is not real resistance until the 1.0523 / 50% Fibonacci level, a 73 pip gain at least. This level has not proven to be strong support or resistance, so if the USD is rallying the more likely target is 1.0600, the 38.2% Fib retracement level, for a gain of 145 pips, and almost 3:1 reward : risk ratio.
· To Go Short on the Pair: Entering a short position at 1.0455, you can place a 50 pip stop loss, and have no support until 1.0358, a 97 pip gain, and no significant support until1.0200, a 255 pip gain, for a 5:1 reward to risk ratio.
Which way to go? Ideally, watch the market and see which way it moves, and don't try to fight the market. If you can't actively monitor the trade, consider placing an OCO (one cancels the other order) comprised of a:
· buy limit (long) order just above 1.0455 once it gets hit (i.e. order to buy once the level is breached) AND
· a sell limit (short) order to sell once this level is breached
Of course, the 50 pip stop loss level is not set in stone. The idea is to allow just enough room to avoid getting stopped out by normal daily movements while keeping losses small. One could argue for a larger or smaller stop loss margin.
This is a classic case of low risk high reward trading. You don't know if you'll be right, but your losses will be small and profits 2-3 times higher, allowing you to be right less than half the time and still be profitable.
This is also a classic case of what every trader should have going into every trade: a plan. One that includes entry, exit, stop loss and target at bare minimum.
DISCLOSURE: NO POSITIONS