I am currently only trading one lot and am having the following issue. I use major swing high/lows, trendlines, and whole numbers as support and resistance. In my mind I always picture these levels as holding when calculating my risk:reward. However since I like to always have a 1:2 risk:reward, this makes trading very difficult when support/resistance are close together. How do you view support and resistance? Are there levels that you count on holding and others that you don't? When calculating risk:reward do you always factor in the nearest support:resistance levels? Eventually all support/resistance levels break but how do I know when to discount a level when calculating risk:reward? I hope this makes sense. Below is an example of how a risk:reward ratio of 1:2 coupled with support/resistance would cause me to stay out of a trade.
Lets propose that I am looking to go long at 1.2960 because of a specific setup
The next closest resistance is at 1.2980, which would be a reward of 20 pips
This means by definition (1:2 risk/reward), my stop must be 10 pips or less
However, by pure PA, I can see that I need a 15 pip stop to invalidate the trade. This violates my risk:reward rule and I therefore pass on the trade
In my opinion, there are a number of solutions:
1. Reduce my risk:reward ratio
2. Somehow increase my target. To do this, I would have to dismiss specific support/resistance levels which is why I am posting.
3. Decrease my stop
I understand your concerns and you have some good points. I'll try to answer in order :
1) If support/resistance is to close to each other maybe your time frame is to small or maybe determine the stronger of the s/r
2) You're saying that you would have to compromise your risk/reward to 1.5:2. First you need to determine your win/lose ratio. Alternatively you could place your order 5 ticks below. This may be more of an option when you start trading 2 lots.
3) The markets could care less about what you want your risk/reward to be. It could give you an opportunity to earn 5 ticks but lose 100. It could not care less. It won't purposely 'hook you up' with perfect 2:1 ratio trading opportunities so you have to understand that sometimes you can go for 1:1 or 3:1 but as long as the median is 2:1 you are still sticking to your rules.
The following user says Thank You to kingk for this post:
Thanks @kingk and @Erich Senft. You bring up some really good points for me to consider. I am trying out a newer approach at this time so I don't have enough live trades with this strategy to determine what my win ratio is. The trade above was a theoretical scenario. However, maybe this is the wrong approach entirely as Erich pointed out. Now I know why I like Canadians! You guys are always so helpful.
Last edited by SammyD; October 29th, 2012 at 02:13 PM.