It’s a matter of fact.
The most part of the traders do not earn money on a recurrent base. They get excited when they have some profits and they get disappointed, frustrated and sometimes even depressed when they lose money.
In the first article on this summary I talked about the importance of having a clear idea about the money we are eager to invest. And that’s it.
On my LinkedIn profile I have just told a short story that is continuously happening to me. You can find it here.
It’s not a matter of mere technical analysis and fundamental analysis. It’s a matter of strategy. Before entering a position we must clear our mind with the exit strategies. Yes, it’s plural. We must know the Target Price AND the Stop Loss.
Where can we put the Target Price? There are two different approaches: the static volumes and the previous traded volumes. As you see, it’s always a matter of volumes.
Let’s start from the second one: “Previous Traded Volumes”. I am going to call it PTV.
The PTV is represented by areas where the price had some hesitations, or the so-called “lateralisation”.
A lateralisation shows something like this
This is the ETH/BTC market on Binance, screenshot from Tradingview. 4H chart, meaning that every red/green square represents 4 hours of price negotiation.
With lateralisation we intend a time range, where price movements are compressed into a tight range. In this case we have 5 days compressed into a 9% price range.
During a lateralisation, price can heavily break upwards or downwards. If we entered a long position, we hope that wil go upwards, but nothing is sure into trading and we must get an exit strategy in case the worst scenario (downwards trend) happens.
The second is the Current Volume Distribution. This is a thinner aspect, but it may provide further results. To have an idea of this aspect, check the ladder volume in big exchanges to check where big orders are placed. Those will potentially be some attraction/rejection areas.
To get a clearer idea, a volume aggregation can provide a deeper perspective on this Current Volume Distribution.
Do you know hot get some parameters on volumes distribution? Well, in my opnion you can check the ration between some volumes, but it’s up to you giving some ideas now since you must define your own parameters to create your own trading strategy. I cannot tell you my own parameters, since the secret for a profitable trading is getting a proprietary strategy, with a defined protocol.
And where should we put Stop Losses and Take Profits?
Well, after this introduction on volume distribution, you should have already in mind some ideas. For example, in the case of a long position, a Take Profit is advisable to be placed beneath a volume cluster (Past or Current or both). In terms of a stop Loss, a good place can still be beneath a Volume cluster to avoid price slippery, in a no-volume area, with unnecessary price drops.
A potential long position can be taken like this
Stop loss just below the spike limit to avoid non-necessary liquidations for previous Order Book Cleansing and take profit below previous maximum, to take advantage of previous Order Book cleansing.
And what about the Risk/Reward?
Well, in my opinion there is not general rule. In clear Swing Trends, R/R can be even 1:1 or 1.5:1. The trend may enhance the speed in closing it.
In lateralisation market phase, I usually use a R/R 3:1, meaning that if the price is 100, my Take Profit will be 103 and my Stop Loss 99. A tight Stop Loss may liquidate my position, but if a downward trend will be confirm, I may get the chance to enter much lower than the entry point and ride the potential bounce-back.
What aspect of trading would you like me to get deeper into? Leave a comment and let’s enrich this section.