How To Trade Patterns In Anticipation Before Confirmation.
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Hello dear crypto friends,
the current potential Head & Shoulders with grandpa BTC on the Daily is very good example, how you can play patterns before confirmation.
We're currently still in a nice Equilibrium between 7,500 and 8,300. Now take the case that BTC doesn't manage to break the $8,300: In this scenario, We can already short BTC in anticipation, that we will eventually get the confirmation of the H&S pattern with breaking underneath 7,500, but we would already make 10% in profits on the way there.
Altogether we would have the potential of 3% loss vs 13% profits. This would give us a R:R Ratio of 4,2, statistically tracked as RRR Planned. Beware: This is not the same as the R-Multiple, which is what we will eventually get, once the trade is done. This leads to a great deal of confusion with beginners.
How to calculate the Position Size
The most important variable is the Stop-Loss Distance: It is $250 in this case. => Statistically this is referred to as the 1R, because from that variable, we can basically portray everything else.
Next we need to know our Account Size & what our Risk per Trade is. E.g. we have $30,000, and our Risk per Trade is 2%: That means on any given trade, we're risking 2% which equals $600. Very important: This has nothing to do with the stop-loss or anything, but rather this is what we're personally willing to risk, independent of any market action.
Now since we know how much we personally can risk per trade, we just divide 600/250. So essentially, our Position Size 2,4 BTC: This is the amount we can allow ourselves to short. (Edgy's Trading Template automatically calculates this, if you don't want to do it manually every time.)
So our potential win in this case of scenario is $3,160 vs. loss $753.
Of course, BTC could even go to 6k, in that case of scenario we would even have 25% profit potential with a R:R ratio of almost 10, but that would account for partial profits in the best case scenario.
Now imagine if we only short after the confirmation of the break:
In that case of scenario, we would still have the 7k. as target, but the problem would be the the Stop-Loss: Usually we would have to look for the last significant lower Highs, before the break, to set our stop loss as invalidation of the break. => Since this is still in the future, we cannot know this now.
But what we could do, is too look out for continuation, once the break happens: We don't want to see a fake-out turning into a bullish Hammer candle: That would be a nice sign of reversal/the bears not seeing follow-through, and in this case we could close our position break-even if we're lucky, or at least with around 2-3% loss maximum, if the fake-out happens immediately. => This second option to set your stop-loss needs much more active management as you can see, so ideally you need to sit in front of your laptop.
But in any case, the R:R is 1,8, as we're facing around 3% loss vs. 5% gains, which is still acceptable. But it is obvious, that we're far away from the anticipation profit.
So conclusion: Anticipation of pattern breakouts can bring much more profit, but in some cases also more headaches. Generally I would advise beginners to understand the Chart anatomy & patterns first, before taking the second step of anticipation, which comes with much more hours of chart-reading and expertise. The most important question you need to ask yourself is: Are you tracking your trades already, or still trading from your head? Let me know & I can help you.
If you had some value from my analysis, give it a thumbs-up & comment it, because the mechanism shows my analysis to other people then. Make also sure to follow me so you get notified on my Crypto Analyses! I wish you a good trading! :)
Edgy is providing trading metrics & online education only. We are not a financial advisor, nor do we hold any formal qualifications in this area. You're trading at your own risk. No matter what you do, please set your stop loss. Please be aware, that you can lose all your money on the online exchanges.
the current potential Head & Shoulders with grandpa BTC on the Daily is very good example, how you can play patterns before confirmation.
We're currently still in a nice Equilibrium between 7,500 and 8,300. Now take the case that BTC doesn't manage to break the $8,300: In this scenario, We can already short BTC in anticipation, that we will eventually get the confirmation of the H&S pattern with breaking underneath 7,500, but we would already make 10% in profits on the way there.
Altogether we would have the potential of 3% loss vs 13% profits. This would give us a R:R Ratio of 4,2, statistically tracked as RRR Planned. Beware: This is not the same as the R-Multiple, which is what we will eventually get, once the trade is done. This leads to a great deal of confusion with beginners.
How to calculate the Position Size
The most important variable is the Stop-Loss Distance: It is $250 in this case. => Statistically this is referred to as the 1R, because from that variable, we can basically portray everything else.
Next we need to know our Account Size & what our Risk per Trade is. E.g. we have $30,000, and our Risk per Trade is 2%: That means on any given trade, we're risking 2% which equals $600. Very important: This has nothing to do with the stop-loss or anything, but rather this is what we're personally willing to risk, independent of any market action.
Now since we know how much we personally can risk per trade, we just divide 600/250. So essentially, our Position Size 2,4 BTC: This is the amount we can allow ourselves to short. (Edgy's Trading Template automatically calculates this, if you don't want to do it manually every time.)
So our potential win in this case of scenario is $3,160 vs. loss $753.
Of course, BTC could even go to 6k, in that case of scenario we would even have 25% profit potential with a R:R ratio of almost 10, but that would account for partial profits in the best case scenario.
Now imagine if we only short after the confirmation of the break:
In that case of scenario, we would still have the 7k. as target, but the problem would be the the Stop-Loss: Usually we would have to look for the last significant lower Highs, before the break, to set our stop loss as invalidation of the break. => Since this is still in the future, we cannot know this now.
But what we could do, is too look out for continuation, once the break happens: We don't want to see a fake-out turning into a bullish Hammer candle: That would be a nice sign of reversal/the bears not seeing follow-through, and in this case we could close our position break-even if we're lucky, or at least with around 2-3% loss maximum, if the fake-out happens immediately. => This second option to set your stop-loss needs much more active management as you can see, so ideally you need to sit in front of your laptop.
But in any case, the R:R is 1,8, as we're facing around 3% loss vs. 5% gains, which is still acceptable. But it is obvious, that we're far away from the anticipation profit.
So conclusion: Anticipation of pattern breakouts can bring much more profit, but in some cases also more headaches. Generally I would advise beginners to understand the Chart anatomy & patterns first, before taking the second step of anticipation, which comes with much more hours of chart-reading and expertise. The most important question you need to ask yourself is: Are you tracking your trades already, or still trading from your head? Let me know & I can help you.
If you had some value from my analysis, give it a thumbs-up & comment it, because the mechanism shows my analysis to other people then. Make also sure to follow me so you get notified on my Crypto Analyses! I wish you a good trading! :)
Edgy is providing trading metrics & online education only. We are not a financial advisor, nor do we hold any formal qualifications in this area. You're trading at your own risk. No matter what you do, please set your stop loss. Please be aware, that you can lose all your money on the online exchanges.
Not
Had a partial short position from the 8,3k range just as described in the idea, got stopped out above 8,413. But the bulls are not in the green yet: they definitely need to see follow-through.
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