Forex – Managing Risk with Precision Entries
By Forex District -
This article outlines the process for executing precision entries. The risk/reward ratio for this method is in the range of 1:10 to 1:50+ subject to position size, market conditions and the point at which the trader decides to take profit.
Managing risk effectively is a critical tool both for profit generation and for long term survival in this market. Trading Forex is like attempting to catch a ride on the back of a wild animal. The trader has several choices. When you put the collar on (open a trade), you either
and with very wide stops 100-200 pips) and let it roam to mitigate the risk of
being mauled, OR
* give it a shorter leash but still let it roam (stops in 30-75 pip range) and trust that
the distance is sufficient to avoid being bitten OR
* you make sure you pick the moment of approach very carefully, snap the collar on
with precision (7-15 pips), keep it on a very short tight leash and muzzle it
immediately (cover the trade at break-even asap) lest the animal whip around to
bite you.
The last of the three, the precision entry method, is a means to effectively manage the high risk nature of trading Forex. When properly executed, precision entries deliver much bigger returns while keeping risk absolutely minimal, regardless of whether the trader is position trading, swing trading, intra-day trading or scalping.
The process for precision entries is as follows –
exceptions, no moving of stops.
2. Trade time of day, news data due and futures must all be conducive to your
directional bias.
3. Price must be at an established support or resistance level, either using fibs or
pivots (daily or hourly levels).
4. As price approaches your level watch for evidence in the 5M and 1M charts of
supply/demand ratio changing and then holding firm (trader must know
candlesticks, particularly engulfing candles, hammers, inverted hammers and
wicks).
5. Watch price levels in that pair’s counterpart pair e.g. EUR/USD counterpart is
USD/CHF (97% correlation as inverse mirrors of each other) and plot support and
resistance on those charts as well, look for confirmation of support/resistance
occurring in that chart also.
6. Wait for price to test on both charts. Price seldom if ever turns around
immediately, it will always test more than once. The second test is often the best
place to get on board because the momentum from the previous direction does
not expire in a hurry, it frequently has one last gasp before giving up. Price may
test again a third time but without the same momentum of the second push
(momentum is being exhausted on each consecutive push).
7. On evidence of the second test support/resistance holding firm, hit the entry
trigger.
8. As soon as the trade is in profit, move stops up/down to cover your position (use
the entry point stop loss pips as a guide to how many pips clearance you need
before covering) so that if price tests a third time and finds legs you didn’t expect,
you are covered.
The worst thing that can happen with the precision entry approach is that the trade is stopped out with absolute minimum risk with a very small pip loss.
The next best scenario is that the trade is stopped out at break-even or in very small profit on the re-test, giving the trader a chance to reassess without taking any damage.
The very best outcome of course, is that the trade continues to run in the direction you expect, the moment of entry picked to near perfection, the risk contained, muzzled, mitigated to the greatest extent possible. The objective is for the animal to be immediately subdued and under tight leash control while you ride on its back, the profits racking up in your account until the take profit target hits.
There’s a saying about fickle creatures – “give it an inch and it will take a mile”. Forex collects the prize for fickle at times. It can also collect the prize for savage. If the entry point isn’t correct, it isn’t correct. Is there really any point arguing? Why allow the animal to have any more rope than is absolutely necessary? Traders often hang on to a losing trade, dwelling in hope that price will return, clinging to ego over evidence, hoping that their original decision was correct. Contrary evidence is confronting. Far better however, to be stopped on a 7-15 pip loss than to be stopped out on a 100+ pip loss or have to close after a 50 pip loss because by that late stage it is then obvious that the direction choice and moment of entry was wrong.
The precision entry system is a very successful and profitable approach (hit rate is around 4:1 wins to losses), but this is contingent upon four critical things –
1. The trader’s ability to wait for price to come to their entry level and to wait for
price to test before getting on board.
2. The trader’s sound judgement to weigh all other impinging factors accurately.
3. The discipline to not stretch stops.
4. Practise.
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