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Determining Profit Levels in Uncharted Territory

By Richard Krivo, Trading Instructor
26 January 2012 02:40 GMT

When currency pairs trade at all time highs or all time lows, many traders rightfully wonder how to go about setting a limit, a point to take profit, when a pair is trading in “uncharted territory”?

There are a couple of strategies that can be employed: 1) Use a 1:2 Risk Reward Ratio; or 2) Take 75% of previous leg down (or up if we are dealing with an uptrend) and use that as the limit.

Let’s use the 4 hour historical chart of the GBPCHF below for our example…

Determining_Profit_Levels_in_Uncharted_Territory_body_chart_7_28_11.png, Determining Profit Levels in Uncharted Territory

In the first scenario we see that our entry would be a break belowsupport at 1.3025 with a stop above resistance at 1.3200. Our risk on that trade, the distance between our entry and our stop, is 175 pips. So, if we are operating with a 1:2 Risk Reward Ratio we would set our limit 350 pips below our entry at 1.2675.

In the second scenario we would look at the previous move that the pair made to the downside prior to its stalling and consolidating as it is on the chart. The previous move was 383 pips. Rather than looking for that move to repeat itself down to the exact same number of pips, I prefer to err on the conservative side and look for a percentage of that move for my profit target. Using 75% in this case, would be 287 pips. Let’s round it off and call it 290. Based on this method we would set our limit 290 pips below our entry which would be 1.2735.

Either strategy is valid and will provide you with a solid technical measure for assessing a potential limit on a trade that is moving in or into uncharted territory.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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26 January 2012 02:40 GMT