Last Friday we noticed this on the EURJPY Chart:
This Cross had sold off back to trend support, and was sitting right on this line. We got long, sending out to our clients the following:
BUY – 123.25
Stop – 122.75
Target 1 – 124.70
Target 2 – 126.65.
We felt at the time that 50 pips was worth risking for a potential return of close to 250 pips. The return if we hit both targets would be 5 times the loss if we got stopped. This is known as Risk/Reward Ratio and in this case was 4.8:1. Actually I’ve always felt this should be called Reward/Risk Ratio as the “reward” figure is always quoted first, but there you go!
All of our trades will always have a “properly skewed” Risk/Reward ratio, In other words we always put out trade ideas where you will make more money than you are risking. Otherwise there’s no point in trading. Why do I say that? Because if you want 50/50 bets you can play Roulette at the Casino. The odds are the same, but they give you free sandwiches, and in Vegas you can even score a free beer, mkaing it a better trade than 50/50! (I know about the green “0” – I’m just trying to make a point!).
If you are following a Trader or Analyst that gives you 50/50 calls then you are wasting your time and money. Just saying!
Anyway I digress. Back to our EURJPY trade. We hit the first target by Friday lunchtime, booking 145 ticks on half the position using our set of rules. Our rules also see stops moved to entry as quickly as possible, so from that moment you have a trade that cannot lose. This is just good, simple Risk Management, something that so many traders fail to realise is key to their success.
By Monday morning the EURJPY Cross had got up to 125.90 so we moved our stop higher once more, to 124.60. This means that even if we got stopped out we would guarantee a net win of 140 pips on the trade, and this is how it’s transpired. We got stopped this morning, but for a PROFIT. Yes the market has rallied since then, in fact we more or less got stopped at the low, but one has to remember there’s always another day in the markets. We’ll have another look tomorrow.
Also we’re still long USDJPY from Friday morning (We bought that at 92.30!) so we’re still in the “Yen weakness” trade that is all the rage right now!
Have a good day, all.