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Chapter 17, Part II. Harmonic Numbers and AB=CD pattern. Page 9

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Ok, we need to open double position, but so that our overall risk was not much then 2% from 5000 USD. Come on, calculate what should be our lot size, so that can open 2 lots and overall potential loss will not exceed 2% of capital.



    Pipruit: Let’s see. Let’s suppose that our potential loss is 40 pips. Our total acceptable loss in this trade – 5000*2% = 100 USD. And we need to open 2 lots – our lot should be 100/0.0040/2= 12500 USD or 0.125 standard lot, hence overall position – 0.25 lots.​

    Commander in Pips: Excellent. 0.25*100 000*0.0040 = 100 USD – you’re absolutely right. So, we enter Long around 1.4486 with 0.25 lot and put our stop loss at 1.4446.

    Our initial target is the 0.618 resistance from the whole AD move – 1.4572. Here we will close 0.125 lot. Our profit will be: (1.4572-1.4486)*0.125*100 000 = 107.5 USD. After that we shift stop loss on the rest of position to breakeven and shift it to riskless trade, according to our first rule – “Reduce risk as soon as possible”.

    Pipruit: And why we couldn’t do that earlier?​

    Commander in Pips: Generally because our profit from the first half compensates our potential loss from total position. But you may think about it also, when the market has passed harmonic swing (about 40 pips) in your favor. Treat trades with harmonic patterns in terms of harmonic swings. The major problem with that is placing too tight stop will make your position too sensitive to possible splashes and will not allow the market to breath. That’s why I suggest moving stop to breakeven a bit later.

    Our second target – 0.786 resistance from AD move – 1.4598. We’ve got fill, so our profit here is:

    (1.4598-1.4486)*0.125*100 000 = 140 USD. And this is risk-free trade. So, overall result 140+107.5 = 247.50 USD or 99 pips on 0.25 lot.

    Pipruit: And why we should move stop to breakeven at all? Second question – why have we closed half of position but not total position at 0.618 or not hold total position till 0.786?​

    Commander in Pips: The major answer on all questions is “because of probability”. Our primary task is to make profit. That’s why we do that at the first target area. If the market suddenly returns back – our potential profitable trade could turn to loss, and we do not want it. For the same reason we shift our stop to breakeven when we take profit from the first half of position. If market will return back – our second half will loose nothing, but our first half has given us the profit already.

    Speaking about taking profit at the whole position at 0.618 target – also nice approach. I have to say that this is in fact an alternative way to manage position. In some cases, when the market returns back – it gives better results, otherwise - when market continues its move up, worse results. But this way is appropriate also.

    We did not hold total position till 0.786 because 0.618 is resistance and the market has chances to not reach 0.786. But as you remember, our primary task is to make profit and not to catch long moves. Hence answer is the same – probability.

    Pipruit: Hm. But the market has shown strong upward continuation after that. We could get much more profit…​
     
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