With some pairs reaching all-time highs and lows, a question that comes up quite often is how to determine a limit, a point to take profit, when a pair is trading in “uncharted territory”?
There are a couple of ideas that merit consideration: 1) Employ a 1:2 Risk Reward Ratio; or 2) Take 75% of previous leg down and use that as the limit.
Let’s use the 4 hour chart of the GBPCHF below as an example…
In the first scenario we see that our entry would be a break below 1.3025 with a stop 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 now. The previous move was 383 pips. Rather than looking for that move to repeat to the exact pip, 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, that 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.
