Reward Risk Ratio Formula, rRR (Take Profit Entry ) / (Entry Stop loss) and vice versa for a sell trade.
Lets look at an example of the risk / reward tool in action to see exactly how it can help us find the most logically attainable profit targets on a trade setup as well as act as a filter for whether or not to take.
Ideally, we want to enter trades during corrective waves/pullbacks, assuming that the trend will continue and the next impulse wave in the trending direction will give us a nice profit.There is no relevance to the close of a 1, 5 or 15-minute candle.The RR tool allows 9 gifts and fruits of the holy spirit you to play around with different stop loss distances (before you enter the trade of course) and see how they affect the reward areas on the chart, to see if a trade makes sense to take.Charts courtesy of my broker: FXopen, a bearish engulfing candle occurs when the fat part of a Down candle completely envelopes a prior Up candle.Fibonacci Extension article ).Also, note there was a key resistance level coming in up near.5717 area that was coming in just above the 1R profit level.
It takes very few trades in the year, but still happens to catch bt claim mobile reward big moves.
By clicking on Levels in the Fibo properties box, under Fibo Levels tab, we can easily delete or add levels to the Fibo tool.
It requires skill in being able to read the market, but provides a better entry priceproviding lower risk and greater profit potential.See the below chart for visual explanation: Image Source: further in this article well go through an Amibroker trading system based on NR7 strategy.He can be wrong four out of five times and still be in great shape.You often read that traders say the reward-risk ratio is useless which couldnt be further from the truth.Engulfing candles show a powerful change in direction.Here the range is calculated as the difference between High and Low of the particular day.The RR tool helps you see if a trade makes sense to take.Check out my Forex Strategies Guide for Day and Swing Traders.0 eBook.Essentially, the RR tool gives you a framework to use for finding the best RR levels on a trade, instead of doing it blindly.Forex Engulfing Candle Trading Strategy Final Word I dont trade every engulfing candle I see.
It all comes down to your reward risk ratio.
Not every pullback ends with an engulfing pattern though, sometimes we can use multiple bars to signal the end of a pullback.