The next thing I do is pick an entry point. Remember, I want the market moving in my direction so I don’t want to get in too soon. But I don’t want to miss out on the trade either.
What I use is an entry point twenty-five percent below the high point (P3). This is simply my choice and many traders use 10%, 15%, 20%. It doesn’t make a lot of difference except the lower the percentage the more likely you are to be filled prematurely resulting in a loss if prices move higher.
The higher the percentage the more likely a reversal has actually occurred.
22 pips times .25 (25%) is 5.5. Subtract that from 1.36356 (35.6) we get 1.36301. That’s where I’m filled.
Next, I figure how far prices may decline. If they repeat the previous decline (or better) it would be 22 pips. 1.3635.6 (the high point) minus 22 is 1.3613.6. I make it 1.3613.9 and that’s where I close out the trade. I make 16.2 pips.
But wait. There’s more. At 07:47 (sounds like the jumbo jet) I make an “add-on” (add to my position) at 1.36219 that enhances my profit significantly:
I won’t tell you how much I made on this trade but you can figure it out depending on how much cash you would have had in action.
That’s what I want to impress on you. If you believe in the analysis of your trade you won’t be afraid to do what I did. Instead of pulling back you’ll “bet up the table” so you’ll easily make your five percent (remember our goal?).
By the way, if you’re curious, the low for this swing was actually 1.36075, for a total of 28.1 pips. That easily bettered the 22 pips we had projected. Let me show you one more trading day if you’re still skeptical about all this.
This is the five minute chart of the EUR/USD on 24 September 2007. The swings, starting around 3 AM to about 8:30 AM, are as follows:
What this shows is the tendency of prices to expand in the direction of the trend. If we assume this to be the case in the early part of the trading day, then we’ll feel more confident with each new trade.
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