Risk versus Reward
Silver prices advanced further from last week´s chart book review.
Now what? The question is: “How much for how much”?
Risk versus reward is likely the most overlooked and misinterpreted part of trading. The most common approach of R/R by technical analysts is to set an expectation prior to a trade entry. A relationship between entry, stop and target price.
It leaves completely out what actually happens in the market thereafter. No matter if you use advanced methods like chandelier and parabolic sar, or standard ones, like percentage trail or price increment trail stops, they all simply leave true probability equation of actual market behavior, for the most part, out. As a result stops are most often placed to tight and exits are far from ideal. Lets illustrate on this weeks market behavior one exit strategy that is principle based and rather maximizes profits according to actual market behavior.
We are long two positions, silver and gold, and have captured sizeable profits on each position with having taken off 75% of position size on each trade.
So we are left with two runners (the last 25% of a position), one in gold and one in silver.
When Gold hit a strong resistance zone on its daily chart, we aggressively exited the gold position in its entirety
Gold in US Dollar, daily chart as of March 17th 2019 a
Prices advance a tiny bit more that day, but took out two days of profit in the consecutive session:
Gold in US Dollar, daily chart as of March 17th 2019 a
Prices advance a tiny bit more that day, but took out two days of profit in the consecutive session:
Gold in US Dollar, daily chart as of March 17th 2019 b
The aggressive profit taking on a market related position leaves us with the needed degree of freedom. It provides our silver runner the room to breathe for a possible second leg.
This positions stop is still resting at break even entry levels. If getting stopped out now on this 1/8th of total position size of both gold and silver position combined, it is virtual meaningless. Should a trend continuation evolve on the other hand, from these price levels here, even this relatively small amount of money exposed to the market, can contribute substantial additional profits. Let us point out that we kept the silver runner versus the gold one for a reason. Looking closely you can identify that silver actually had broken already some resistance above (red line).
This makes it as such the preferable choice:
Gold in US Dollar, 60 minute chart as of March 17th 2019 b
The daily chart shows even more drastically, “how much” would have been needed to risk in regards to a wide stop, for possibly locking in larger profits.
Any of the previously named stop methodologies would have been taken out and minimized returns.
Silver in US Dollar, daily chart as of March 17th 2019 b
The true meaningfulness of a bit more complex exit strategy, versus the one of a preset indicator, is the psychological degree of freedom it creates for the market participant. It allows for ease of execution. And with more choices created, an alignment along the markets. So it truly allows for profit maximization without sleepless nights.
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