How to Stalk a Low Risk/ High Reward Trade
“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, preferably one that is sick or lame. Only then, when there is no chance it can lose it’s prey, does it attack. That, to me, is the epitome of professional trading” – Mark Weinstein, Market Wizard
Mark Weinstein is wrong.
Cheetah’s stalk their prey by sitting on a rise in plain view so they can make use of their excellent eye-sight, and they stay away from bushes as it hampers their ability to run.*
But the analogy is still a great one for traders.
The best trades are found by patiently stalking an entry that allows you to risk less if you are wrong, and make more if you are right.
What is a low risk/ high reward trade?
A low risk/ high reward trade does not mean a high probability trade.
You can be wrong 50% of the time or more and still make significant amounts of money in the Forex market.
Rather a low risk/ high reward trade is when you have a profit objective several times bigger than your potential loss on the trade because you can have a tight stop loss.
Why is this important?
Because if you can find a position that will allow you to have a tight stop, you can trade a larger size than if you have a wide stop. This means that your profits if the trade goes for you will be greater, but the loss will be limited to the same amount.
Think about it this way.
If you have a maximum risk of $500 on a trade and you have a 100 pip stop loss you can afford to trade a lot size of 50K. But if you can tighten your stop-loss to 50 pips by patiently stalking the right time to enter you can afford to trade a 100K lot size, meaning any profits will be twice as big.
Plan your trade
Stalking an entry starts with a good idea.
Plan the trades you are wanting to take based on:
- Your model of what works and what doesn’t in the market
- The current market type
- Higher time-frame technical analysis
- Any micro-fundamental drivers (My fancy way of saying “news”)
- Your profit objective
Once you have formulated a solid idea about the direction of the currency you are planning to trade, you then go into stalking mode.
Stalk your trade
I’m going to give you a specific entry technique that you can use for stalking called a low volatility breakout.
(You can find out more about this and other techniques in the Advanced Forex Trading Course for Smart Traders)
The Forex market contracts and expands from quite to periods of high volatility. These expansion and contractions can make excellent place to enter your trade with a tight stop.
On the currency pair you are looking to trade go down to a lower time-frame. Personally I tend to formulate my trade ideas off weekly and daily charts and then go down to four hour and one hour charts when I’m stalking. It works on the 15 minute charts too.
Add the Bollinger bands to your chart with a setting either 10 or 20 periods (I use both depending on my discretion).
Then you look for a time where the Bollinger bands have contracted into a tight range. When the price closes outside this range then you can enter your first position.
Let’s take a look at some examples:
You can see on this chart of 1 hour chart of the AUD/NZD how price contracts before expanding.
On this chart of the GBP/USD you can see how you could join the downtrend with a tight stop.
There are plenty of other ways to stalk an entry. The important this is to relax and wait for the opportunities and take action when they come.
Note: if the break-out bar is too large you might not want to take the trade as the risk/reward profile will have deteriorated.
It’s your turn…
Stalking an entry takes steely resolve.
Be patient, like Mark Weinstein’s fictional cheetah, and only strike when the time is right.
Time to get out your trading plan and note down how you are going to stalk your entry.
Want more? Get the Advanced Forex Trading Course for Smart Traders for free.
*Thanks to the trader that pointed this out to me.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free: https://fxrenew.com/newsletter-sign-up.