In this series we covered a checklist of components professional traders routinely use to create strategies or initiate trades when probability favors a sharp vertical move. The combination of below average range and above average time at price is one of the most powerful signals for timing a breakout or onset of a trend.

“Ducks in a row” or “planets are aligned” are common metaphors used to describe when conditions are right for an above average vertical move. When odds favor a breakout, entry is the next task and after entry risk must be defined. These issues were addressed in previous articles. Setting targets and protecting those profits are the next chores on the “pro trader’s checklist.”

Managing risk while a market moves toward a target is a skill that is difficult to quantify. Honing the correct risk/reward ratio is relative and varies for all traders. For example, day traders hold no positions overnight. Thus, their max target should be about the length of an average day. No matter what time frame suits your style, you must set relative targets, which are also used to define risk and trailing stops. 

For targeting and risk management refer to Average True Range. ATR is used to project profit potential and a percentage of that range is used to define risk. My goal is to find setups where profit potential outweighs risk by 3 or 4 to 1. And the odds for a breakout are high. Once in a profitable trade, I’ve found that setting the initial stop loss at 50% of an average day range is sufficient. When a trend begins, a market normally does not reverse more than 50% of a daily ATR for a couple of sessions. This method can be applied to trailing stops as well. For example, if the market accelerates upward the trailing stop should follow each new high by half a day range.

This is just one method for protecting and adding to profits. If a trade is meant be held longer term, expand the time frame to set targets and stops. For instance, use weekly ATR to project profit and 50% of that to define risk.

John Seguin, Market Taker Mentoring