Price does not owe you a round trip
You caught the bounce and marked your target at the top of the move that just fell. Then price stalled a third of the way there. The drop does not promise the same distance back. Your target lives at the next level overhead.
Marking the target at the top of the old move
Price falls from 112 to 100. A hammer prints on the hourly at 100, you buy the bounce, and you set the target at 112. That number came from the chart's history, not from anything standing in front of price.
What happens next is familiar. Price runs to 103, sits there, then rolls over. You give back the open profit waiting for a level you picked out of memory. On short-dated options you pay for the wait as well.
The reversal was a pause in the selling. Sellers stopped for now. Buyers have to clear everything the fall left behind. The highs made on the way down. The gap that opened. The resistance you drew two days ago. Each one is a place the bounce can end.
Walk forward from price and take the first obstacle
Your target is the first place price has to fight, read in the direction you are going. Find it the way you find support. Start at the current candle and walk forward, one obstacle at a time.
Going up, the obstacles are the highs above you. The high of the last candle that failed. The lower edge of a gap box left overhead. The wick extreme of a bearish pattern on the hourly or the 4-hour. The first one you reach is target one.
Most of them are already drawn, because they are the same resistances you marked before the open. This adds no work to your morning. It stops you inventing a number that no candle put on the chart.
The arithmetic decides whether the bounce is worth taking
Same example, with the levels drawn. Price turns at 100 off an hourly hammer whose low is 99.60. You enter at 100.40 and put the stop under the wick at 99.40. Risk is one dollar.
Overhead sits a falling window between 103.20 and 103.80, then a prior high at 106. The first obstacle is 103.20. Reward is 2.80 against a dollar of risk. That pays close to three to one, before you touch the second target.
Now price the fantasy version. Aiming at 112 does not improve anything, because you still have to get through 103.20 and 106 first. The 2.80 is on the chart. The 11.60 is a hope with two roadblocks inside it.
Take partials at the obstacle and let the rest prove itself
Sell part of the position at the first obstacle, while price is still moving your way. Scaling out into a candle that is going your direction gets a better fill than scaling out after it turns.
Keep a small remainder for the second level. If price closes above 103.80 with volume behind it, that window has flipped and 106 is live. If it stalls and closes back under, you already banked most of the trade and the runner costs you little.
Short-dated options add a clock to this. A target three obstacles away needs hours to arrive, and decay charges you for every one of them. How patient you may be gets decided when you pick the expiry. Not later, with the trade sitting still.
Set the target before you enter, not after
Two minutes of work before the click. The output is one price you are aiming at and one price that ends the trade.
- Mark the level you are entering against and the wick extreme it comes from.
- Walk forward from current price and write down the first three obstacles above.
- Take the nearest one as target one, even when it looks unambitious.
- Measure risk from your entry to the stop under the level, in dollars.
- Divide the distance to target one by that risk before you enter.
- Skip the trade when the first obstacle pays less than twice your risk.
- Delete any target you chose because it was the start of the previous move.
- Decide now what fraction comes off at target one.
- Write the condition that lets the runner stay in, such as a close beyond the box.
- For short-dated contracts, write the time you give up on the trade.
- Log the target you set and the price where the move actually ended.
Frequently asked questions
As far as the next obstacle in its direction. That distance changes with every chart. Take the target from your levels rather than from a rule of thumb.
Only when that price happens to be the next level and nothing sits between you and it. Otherwise you are asking the trade to clear several obstacles you have not planned for.
Then the setup does not pay and you skip it. Widening the stop to make the ratio work moves the stop away from the level that defined the trade.
See what holding on costs you in TraderLog
TraderLog compares your average winner against your average loser and splits results by hold time. It also points out when your losers are held longer than your winners. All of it runs on imported Schwab or IBKR fills.
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