Improving Risk/Reward with Extended Targets

In this article, you’ll learn how we managed to extend our targets to bag a +3.26R winner instead of our original +2R target. We’ll be using a EURGBP short that we took this week (12th March – 16th March) both in our Trading Floor and public Telegram channel, as an example.

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Despite a slow start to the week, considering we only took our first trade late into Tuesday (which ended as a losing trade), we’re ending it off on a profitable note. We can thank EURGBP and GBPUSD (currently still running with some profit locked in), for that.

The winner on EURGBP was a straight forward bearish flag and supply zone setup.

On the chart, you’ll see a flag drawn using the parallel lines tool on TradingView. This represents the flag formed after a bearish impulse. Typically in these kind of setups, our bias is bearish and a retest of a supply zone would be our preferred entry.

You’ll see that after we had a breakout of the flag, price formed a supply zone (identified by the red box). This gave us a reason for entry, and we placed a sell limit @ 0.88849. Stops would have to go above the flag (about 20 pips), and we had our initial target back at a demand zone at the bottom, which was around 40 pips, giving us a risk/reward of 2.

As expected, price retested our supply zone, giving us a more or less perfect entry (we love perfect entries!). Consequently, price made a push down towards our initial target, which was about 40 pips. This was when we zoomed out of the chart and noticed a higher timeframe trendline which price has been respecting for a few weeks. We closed a small part of our position before extending our target towards that trendline. How did we know that price was going to reach that trendline? 

We didn’t. But what we understand is that trendlines (or any form of structure or supply and demand zones), act as magnets. Price is attracted to these zones. We don’t have to care or understand why, but we do need to know how we can make money off of this information. And that’s what we did exactly. We made a prediction that price would attempt to retest that trendline, so we used that to our advantage and moved our take profit level to where we expected price to retest the trendine.

Initially our risk/reward was 2, considering that we were risking 20 pips to make 40 pips. However, after moving our take profit level, we were risking 20 pips to make around 65 pips. This gave us an improved risk/reward of about 3.26. And all we had to do was extend our targets. 

Price came back up close to our entry to retest structure before making a strong impulse towards our target. About 5 pips away from our target, price consolidated for about half a day, which shows that there was some buying interest in that area. Price eventually went on to hit our target and even break and close below that trendline.

You might be thinking, why not hold on for more, considering that price broke and closed below the trendline. That’s a dangerous way of thinking right there. Because if you think that way, when will it ever end? There’s a difference with being logical and being greedy. Know when to extend your targets and know when to close your position. We’ll speak more about that in another post.

Trading doesn’t have to be hard. Don’t worry about having a high winrate or getting the perfect entry (even though we tend to get them often). Worry about minimizing your risk and improving your reward. 

Because when you minimize your risk and improve your reward, all you need is a decent winrate (about 30%) to achieve profitability. That’s how you attain a long term positive expectancy.