The Bollinger Band reversal setup I posted on Wednesday has been triggered. Here are some thoughts on stop loss management and profit objectives for readers interested in following this trade.
Wednesday’s post talked about the possibility of buying on the first close taking out the high of any candle forming a trend trough above the Bollinger Band.
Sometimes a more practical alternative with 4 hour charts can be to use a stop entry order a certain number of pips above that candle (especially late at night Australian time). This cuts down the extent to which you have to sit up watching the market. It also gives an earlier entry than waiting for the close if there is a very big candle.
The downside is that you can occasionally get caught by a stop entry on a candle that reverses and ends up making a low under the candle you thought was going to be the trough. If you set a stop loss order at this level, it will take you out of the market. On a swings and roundabouts approach, the odd loss on one of these is made up for by earlier entries on other trades and it beats burning the midnight oil watching something that doesn’t set up anyway.
The entry level shown on the chart assumed a stop entry was set just on the other side of the 20 day moving average and about 25 pips above the high of the trend trough candle.
The strategy shown on the chart seeks to use the “road map” of recent price history. In this case, the fact that the decline from 1.6384 appears to have taken a 5 swing structure is used. This means that if we get a decent rally from here, it’s likely to be a correction rather than the beginning of a new move past 1.6384.
The initial target, is based on the assumption that there’s a good chance that a correction like this will retrace at least 38.2% of the downtrend.
However, the market road map might create an opportunity to set a higher target if an uptrend gets underway. If we start to develop what looks like an ABC correction, Fibonacci projections could be used to set new that higher target.
If nothing else, hitting the 38.2% level, can also be used as a trigger to start trailing the stop loss higher to defend profits
The initial stop shown on the chart is set just behind the low of the trend trough candle.
If a significant uptrend gets underway, this could be moved up behind any major swing lows or overlap peaks.
I’ll post follow ups if there is an opportunity to move the stop or adjust the profit target higher using this type of approach.