Most price action traders place buy or
sell stop orders with a pre-determined stop loss level, and a take
profit or target level. The buy or sell stop sets the level that price
much reach for the order to be filled; the stop loss level sets the
margin of loss that a trader will accept before closing the position;
the take profit level sets the level at which to automatically close a
successful position. Basically, you determine risk based on where you are placing your stop,
and then determine your target with regard to this risk level; commonly,
traders will aim for at least a 1:3 risk to reward ratio, although
scalpers and those who trade on shorter time frames often have to accept
smaller ratios.
The buy or sell stop, or entry level, is typically set at a significant support or resistance level so that it will only be filled when price has broken definitively in the desired direction; by setting strategic entry levels in their orders, traders can ensure that they enter trades with the momentum of the market. Perhaps the most basic set-up is the pinbar, which, if you remember has an open and close within the previous bar, and a wick at least 3 times the length of the candle body, protruding beyond the levels of prior bars.
The basic way to trade a pinbar is to place the stop loss level at the extreme of the wick, and to place your entry level above the body in a bullish scenario, and below the body in a bearish scenario. the target is set relative to the risk level represented by the stop loss, often at a resistance level in a bullish scenario, or at a support level in a bearish scenario.
Another basic strategy is the inside bar, a bar or series of bars contained by the preceding bar; since the shrinking candle size implies consolidation, it can mean that a big move is on the way, either a strong continuation of the current trend, or a reversal. Inside bars are more effective to trade on larger time frame charts because they are so common on faster chart.
The buy or sell stop, or entry level, is typically set at a significant support or resistance level so that it will only be filled when price has broken definitively in the desired direction; by setting strategic entry levels in their orders, traders can ensure that they enter trades with the momentum of the market. Perhaps the most basic set-up is the pinbar, which, if you remember has an open and close within the previous bar, and a wick at least 3 times the length of the candle body, protruding beyond the levels of prior bars.
The basic way to trade a pinbar is to place the stop loss level at the extreme of the wick, and to place your entry level above the body in a bullish scenario, and below the body in a bearish scenario. the target is set relative to the risk level represented by the stop loss, often at a resistance level in a bullish scenario, or at a support level in a bearish scenario.
Another basic strategy is the inside bar, a bar or series of bars contained by the preceding bar; since the shrinking candle size implies consolidation, it can mean that a big move is on the way, either a strong continuation of the current trend, or a reversal. Inside bars are more effective to trade on larger time frame charts because they are so common on faster chart.
