Where are the best places to set a price action take profit? Well, that really depends on your trading strategy and what your testing has shown you.

But if your take profit is frequently being missed, or you feel like are leaving money on the table after a lot of trades, then you should consider testing these two take profit levels.

They are the most reliable take profit levels that I know of.

Like a lot of things in trading, the simpler your method, the greater your chances of success.

…and these are very simple.

Just Before the High or Low

The first target level to look for is just below the high, or just above the low. If there are only two candles at the support/resistance level, then putting your level through both candle bodies is your best bet.

For example, if your trading method is signaling a long trade at this point, this would be a a good profit target.

This is also a good potential target level because there aren't many major price action levels between the current level and the target level.

Here's another example of where a profit target just above the low would have been a perfect take profit for a short trade. The target was hit at the blue arrow and once price hit that level, it went up and never looked back.

A common beginner's mistake is to set the take profit at the highest/lowest point, like this…

This is a low probability take profit level and is not likely to be hit, unless there is unusually strong bullish price action. This is what commonly leads do missed profit targets and losing trades.

It may be tempting to try to milk every pip out of the trade. But remember what they say about hogs and pigs…

Inside the Elbow

Another high-probability zone is in what I call “the elbow.” It is the area inside where price turns. This is especially true if price action is choppy in that area.

Here is an example of a chart where the elbow was hit. The elbow is marked by the blue arrow.

This chart shows an elbow that not super obvious, but would act as a good profit target, IF your trading strategy has signaled a long trade. At the time this post was first written, this is a live chart, so I don't know for sure if that level will be hit.

But if you are reading this later, you can see if that level acted as resistance. It may not get to that level, but if it does get there, you can see how it reacted.

Here's one more example where the elbow was hit and acted as heavy resistance. Again, it was an ideal profit target.

Before a Previous Level of Support/Resistance

The last place that I look to take profit is at a previous level of support or resistance. This can come in different forms, so here are some clues to look for.

• Price ranges
• Multiple rejections of a level (engulfing bars, pin bars, reversal bars)

Final Thoughts on Trading Take Profit Levels

The bottom line is that these two areas are heavy support and resistance levels. That is why they work so well as take profit levels.

But don't take my word for it, test it for yourself. This guide will show you how to backtest it. There is so much random information on taking profits out there. Find out for sure!

Remember that you will need to have a good reason to go long or short, in the first place. You cannot target any elbow or extreme and expect to make money.

This is simply a way to potentially optimize your exits. 

Happy trading!

The post The Best Take Profit Levels for Price Action Trading appeared first on Trading Heroes.

The Three Drives Pattern is a well-known harmonic chart pattern. It is a relative of the ABCD pattern, for reasons you will learn about in a bit.

This pattern was mentioned in Robert Prechter's famous book “Elliot Wave Principle.”

In this post, I will explain how to identify it and show you how it is traded.

If you want to learn how this pattern works, this post will give you everything you need to know.

But that's not all…

I will also show you how to backtest the pattern so you can find out if it is really something that you want to pursue in your live trading. 

Here we go…

How to Identify the Three-Drive

The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.

Sometimes the reversal can be a huge move because the built-up pressure is finally released.

Not always of course, but that is what happens when it works well.

Are there time and distance requirements for the moves? Some books say yes, others say no.

So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.

Let's take a look at how it works…

Bullish Three Drives

In the bullish version of this pattern, there are three drives or pushes in the upward direction.

After each push, there is a retracement, marked A and B. The retracements are a 0.618 Fibonacci retracement of the previous drive.

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern.

When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3. 

At least that is how the textbooks teach it. So that is where you should start testing it.

Let's take a look at a real example, so you can get a better idea of how this works.

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView and Oanda data.

For those of you who want to follow along at home.

Here's what the chart looks like when we mark point zero.

The first retracement hits the 0.618 Fibo level almost exactly.

Now if you Fibo the retracement, you will see that price extended way beyond the 1.272 extension. So if you were following the rules of the Three Drives Pattern exactly, this would no longer be a valid signal.

However, just for fun, let's keep going…

The next retracement also blows through the 0.618 retracement level.

The next push hits the 1.272 Fibonacci extension exactly.

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.  In this example, that gets hit easily.

So in summary, this was not a textbook pattern, but it would have ultimately worked out. That brings up the question:

Should I follow the system exactly or should I allow the rules to be bent?

Well, that all depends on what your backtesting tells you. 

Bearish Three Drives

Then of course, the bearish pattern is the same thing, but upside down.

How to Trade this Harmonic Forex Pattern

Just like with any other trading strategy, different traders will trade this pattern in different ways. But let's take a look at the most commonly taught way to trade this setup.

It is a good starting point for you to do your own testing and optimization.

There are basically three ways that you could enter a trade:

1. Put in a pending order at the last 1.272 level, with a stop loss guess
2. Wait for the market to print a strong rejection bar, like a Pin Bar or Outside Bar, then enter the trade, with a stop loss on the other side of the bar
3. Wait for the market to break through the 1.272 level, then put in a pending order if the market drops below the 1.272 level and use the previous swing high/low as the stop loss

Most resources will tell you to wait for the level to be rejected, then put in a trade (#2). So let's go with that method for now. 

Potential Optimizations

When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI can be a good indicator to use.

As you can see from the example above, drives 2 and 3 form higher highs on the chart, but RSI forms a lower high on drive 3.

Another potential optimization is to look to see if the top of drive 3 matches up with a previous major support or resistance point. In the same example, the turning point does indeed match up with a resistance level.  

How to Backtest the Three Drives Pattern

Alright, now let's get down to business.

After most traders read about a trading strategy, they go directly into trading it in their live account.

…and big surprise, they lose money and they say that it doesn't work. There are so many things that can go wrong in between the time you learn a trading method and actually trading it with real money.

Here's a short list:

• You misread the instructions
• You are risking too much per trade and are freaking out every time your trade moves one pip
• The trading method doesn't actually work and it turns out that everything on the internet is not true
• You start trading it correctly and forget the rules because you didn't write them down
• You think you know better and keep changing the rules
• You second guess yourself and miss good trades
• And more

These are natural mistakes that all humans make. Myself included. So why risk your hard-earned money on your unproven skills? 

First, write down the exact rules of the system that you want to test.

You can download the backtesting plan worksheet for free here.

This will ensure that you don't deviate from your plan.

Next, you need to backtest your system and make sure that it has positive expectancy.

Fire up NakedMarkets and test your system.

If it does not work in backtesting, then it certainly won't work in live trading.

Once you have a system that works in backtesting, then move it into a demo account. Do not risk real money at this point. 

Only when you are comfortable in a demo account, should you even consider trading live. 

Other Resources

Here are some other resources that you can use to learn more about this chart pattern.

It's always a good idea to look at how others are trading a chart pattern, to get ideas on how you can improve your strategy.

You don't have to follow them exactly and you will probably throw out a lot of the ideas. But it only takes one good idea to dramatically improve your results. 

• TradingView Three Drives tag – These are charts that community members have posted on the TradingView website.
• YouTube videos – Here are the search results for videos related to this chart pattern.

A Close Cousin: The ABCD Pattern

One pattern that you will hear associated with the Three Drives is the ABCD Pattern. This could also be called the Two Drives pattern…I guess.

If I had to choose, I would personally start testing the Three Drives first because there is a greater chance that price will reverse after three moves, than two.

Price simply has to travel a longer distance and therefore will be more “tired.”

Conclusion

So that is how you identify the Three Drives technical chart pattern.

Remember that just because you see other traders using this pattern, does not mean that it will work for you.

You need to backtest it for yourself and figure out if it matches your trading personality.

Never take anyone's word that a trading system works.

Not even me

Do you own homework and you will progress much faster as a trader.

The post Three Drives Pattern Explained appeared first on Trading Heroes.

Understanding a couple of things can shave months, or even years, of your learning curve. One of those things is figuring out your Trading Timeframe Personality and the other is figuring out your Chart Pattern Personality (CPP).

When you understand these two things, it makes it much easier to select trading strategies that match you and gives you a higher likelihood of success in Forex trading. Luckily, there are only three types of Chart Pattern Personalities.

Yes, you might be naturally good at two or all of these types of chart patterns. But in the beginning, just choose the ONE that you are best at and perfect a strategy around that chart pattern type.

You need to do this because people's brains are generally best at spotting one type of pattern and it will help you focus on methods that are more likely to bring you success. 

Just because a trader tells you that one type of pattern is the best, it doesn't mean that it will work well for you. They mean well, but you have to experiment for yourself, to find out what is best for you.

I'll show you how you can do that at the end of this post.

But first, let's take a look at the three chart pattern types.

Trending Chart Patterns

The first chart pattern type is a trend. I'm sure that you have heard the saying: “the trend is your friend.”

Well…

Not if you and trend trading don't get along.

Some traders are really good at it. However, if trend trading does not suit you, then you will struggle at it for a long time…and wonder why.

As with any other type of chart pattern, there are different ways to define a trend. Some trading systems use moving averages, others simple price action cues.

The actual system is irrelevant. You have to find out if you are good at trading with the trend and riding it to your exit point.

Take this chart, for example. Are you comfortable buying at the arrows?

This is more of a “bargain hunting” trend trading technique.

…or does that totally freak you out?

Another way to trend trade is to buy on new highs. In this example, you would buy at any of the orange lines. It's more of a momentum trend entry strategy.

Are you comfortable with that?

If either of those entries appeal to you, then you might be cut out to be a trend trader. This type of pattern works well for traders who like to see results right away and feel good riding the wave of buying or selling.

Countertrend Chart Patterns

Other traders are better at spotting turning points in the market. If you like to be a contrarian in your daily life and enjoy proving people wrong, then countertrend trading might be for you. 

There are a few different ways that you can be a countertrend trader. One way is to trade against the price action into a support or resistance zone.

For example, on this chart…as price moved up into the orange line, would you be able to take a short position?

Of course, it's easy to say “yes” in hindsight. But imagine that you can only see price action before it hits that line.

It looks like it will keep going up!

But if you have tested your strategy and you know that it has a good probability of reversing, then you will have the confidence to take this trade.

…and if your personality matches this chart pattern you will be more likely to keep trading it, even when you are in a drawdown.

Breakout Chart Patterns

The last type of chart pattern is the breakout.

I'm personally not great at trading breakouts, so I avoid them. But it certainly works for some traders.

Here is a pure breakout from a price range. I say pure because some people trade a breakout and retest of the channel as an entry signal and I see that as more of a trend trade.

As you may have experienced in the past, the biggest difficulty with trading breakouts is that there are a lot of false breakouts.

Like this one…

That can be tough to stomach, unless you know the probabilities.

Breakouts are in a separate category because it's the only type of chart pattern that doesn't take into account the previous price action. You are simply looking for a consolidation, then a breakout of that holding pattern.

How to Figure Out Which of the Chart Pattern Personalities Matches You

Now that you know the three basic types of chart patterns, the next step is to figure out your Chart Pattern Personality. In other words, which chart pattern type do you trade best?

In order to get this information, there is no way around it…

You will need to do some work. 

First, select one trading method from each of the three categories above. Right now, don't get caught up in if the strategy actually works or not.

You are trying to figure out is which type of pattern you prefer trading, not the exact method. 

There are many places that you can get trading systems. You can dig up courses you have taken in the past or choose a system from one of the free forums out there.

If you want to keep it simple, you can just trade price action.

After you understand which type of pattern you gravitate to most, then you can start searching for specific trading methods that work. More importantly, you can start to build your own unique trading method by combining different elements of similar trading systems. 

Again, figuring out your CCP may not be easy.

But if you put in the time to understand this first, it will save you a ton of time later. 

Conclusion

This was a quick introduction to the three main types of chart patterns and why it is important to identify which one you resonate with most.

To get a list of commonly traded chart patterns, read this post.

Of course, there are different variations of each pattern. But when you examine tradable chart patterns, they basically boil down to these three types.

You may resonate with more than one. But choose one and stick to it until you figure out a specific strategy that works for you.

Otherwise, you can get stuck on the Trading Silodrome.

…and once you get on, it's very difficult to get off.

Also remember to figure out your Trading Timeframe Personality. It goes hand in hand with your CPP.

Now get to work!

If you have any questions about chart pattern types, leave a comment below.

The post 3 Types of Chart Patterns: Which One Fits You? appeared first on Trading Heroes.

Some traders say that you should never move your stop loss to breakeven and others say that you should do it on every trade.

So who is right?

Well they both are.

I know of professional traders who move to breakeven and I know others that don't.

Every trader needs to figure out if moving to breakeven will fit their trading strategy, the markets they trade and their unique psychology.

In this tutorial, you'll learn when you should move your stop and when to leave it alone.

The best solution will be different for everyone, so you need to figure out what works best for you.

I'll also show you a couple of ways of moving to breakeven and beyond, that can make your trades more profitable.

Let's do this…

What Does it Mean to Move the Stop Loss to Breakeven?

If you're new to trading, I'll quickly define moving a stop loss to breakeven and give you an example.

In trading, moving a stop loss to breakeven refers to the practice of adjusting the stop loss level to the trader's entry price, plus a little profit to cover costs like slippage, the spread and commission. This is done after the market has moved in a profitable direction and ensures that the trader will not lose money on the trade, even if the market reverses. 

The idea behind this tactic is to create a situation where a trade is risk-free.

Example

Here's an example of a trade setup.

This is a long trade, entering at the current candle.

The red bar at the bottom of the box is the stop loss and the green bar at the top is the take profit.

Once price moves in my favor, I can set the stop loss to breakeven by moving the stop to the entry point.

I usually move Forex trades to the opening price, +3 pips profit to account for any slippage and fees.

This is now a risk-free trade. 

So if the trade reverses, like shown below, I would not lose any money on the trade because my stop loss would be at the breakeven point.

Now that you understand how to move your stop loss to breakeven, here are the benefits and downsides of doing this.

Benefits of Moving Your Stop Loss to Breakeven

When you move your stop-loss to breakeven, you do more than ensure that you won't take a loss on the trade.

You also free up your mental capital to find another opportunity.

Mental capital is the “space” that a trade takes up in your brain because you're worrying about managing the trade and if you will take a loss.

Moving the stop to breakeven takes the pressure off your trading because the trade is now risk free and you don't have to think about it anymore. 

This allows you to focus your attention on finding and managing new trades.

Let's say that you have 5 open trades that will either lose 1% per trade, or make 2% per trade.

You then decide to move the stop loss on all of them to breakeven.

Once you do that, the worst case scenario for these 5 trades is that they will all get stopped out at zero profit…and also zero loss.

The best case scenario is that you will make 10%.

So you can see why some traders find this technique so attractive.

But of course, there is a trade off to this benefit.

The Downsides of Moving Your Stop Loss to Breakeven

The downside of moving your stop loss is that it's more likely that your stop loss will get hit often and you'll lose out on profits. 

Just like the ocean, markets have a natural ebb and flow.

So it's best not to move your stop too soon because your stop is much easier to hit and you won't give your trades enough room to “breathe.”

As the saying goes: scared money don't make money.

Here's a common scenario, especially for beginners.

You enter a trade and the trade is profitable right away.

Since you lost your last three trades, you decide to make sure that you don't lose this trade too.

So you think you are doing the right thing and move your stop to breakeven.

Party time!

As soon as you open a drink…you get stopped out.

Then the trade goes 500 points in the profitable direction.

Doh!

This leads to second guessing yourself even more, which will affect your confidence and profit on future trades.

No bueno. 

Move your stop loss too soon and you'll break even a lot.

What this can mean is that your winners won't make up for all of your losers because many of your winners are breaking even.

If that's the case, then your strategy will not have an edge and will lose money.

Of course, it also could be possible that you're dodging some losing trades too, which brings me to my next point.

How to Tell if You Should Move Your Stop Loss on Profitable Trades

Not all trading strategies will work well when the stop loss is moved to breakeven, so it's time to figure out if this is for you or not.

Remember that there are 2 potential benefits to moving your stop loss:

1. Greater peace of mind because your trades are now risk free.
2. An increase in profitability of the strategy because the strategy has fewer losing trades.

In addition, if you are going to move your stop loss to breakeven, you must:

• Do the same thing on every trade: You cannot move to breakeven on some trades and not on others. Not following a well defined plan will lead to inconsistent and unpredictable results.
• Decide on the minimum amount of profit that you should have before moving your stop loss: This could be 1 times risk (1R), or a certain percentage profit on your account. Whatever it is, it must be applied consistently.
• Backtest your trading plan: This will show you exactly how much moving your stop loss will affect your profits.

Trading strategies that will generally benefit from moving to breakeven are:

• Longer term trading strategies (4 hour chart and higher) because it's less likely that the breakeven stop loss will get hit by normal market movements.
• Trading strategies that have a trailing stop loss because they can make up for lost profits caused by moving to breakeven, by extending the profit on winners.

These are not set-in-stone rules, but just general guidelines, based on what I've seen in my own backtesting and the results of others.

Another thing to consider is that you might want to reduce the overall profitability of a strategy, in exchange for the psychological benefits of that come with moving to breakeven on profitable trades. 

Not all decisions in trading have to be profit driven. 

Sometimes you can give up a little profit for greater mental clarity.

When your mind is clearer, you'll usually make better decisions.

Now if you decide that moving to breakeven is a strategy that you want to explore, then it's time to do some backtesting.

How to Backtest Moving Your Stop Loss to Breakeven

The primary question that you want to answer with backtesting is:

Will my trading strategy generate enough profit if I move all trades to breakeven, after they hit a certain amount of gain?

So first, create a trading plan without moving your stop loss. 

Then backtest that trading plan and find out what your baseline performance is.

My favorite backtesting tools are listed here.

Look at stats like:

• Win %
• Maximum drawdown
• Average profit per month/year
• Average winning trade in $
• Average losing trade in $
• Maximum number of losing trades in a row

Example stats by NakedMarkets.

Then create a new trading plan where you move the stop loss to breakeven after X amount of profit. 

The profit could be measured in:

• Pips, points or dollars, depending on what market you're trading.
• A multiple of risk, so 1R would be 1 times risk. In this case, if your stop loss was 100 pips, then your move-to-breakeven target would be 100 pips.
• Percentage of your account. For example, once you hit 1% profit, move the stop to breakeven.

Of the options above, I've seen the multiple of risk method work best and it's the easiest to calculate.

It's also the easiest to automate, if you want to do that later.

A professional trader I know of uses this tool to move his stop to breakeven and automate a trailing stop.

So I'll use risk multiple from now on.

If you don't know where to start, move your stop loss to breakeven once price hits 1R.

Then backtest your strategy by applying this rule to all of your trades.

Once you're done, compare the stats listed above, before and after your change.

Experiment With Your Settings

If your strategy is acceptable after the change, then you're good to go.

Move on to the next step of forward testing your new strategy.

However, if your strategy was not profitable enough, then it's time to do some experimentation.

Here are some things you can try:

• Move your stop loss to breakeven at a smaller profit. For example you could move your stop when price hits 0.5R.
• Move your stop after you have a bigger profit, 2R for example.
• Only move your stop after a certain number of pips or points.
• Use an indicator to determine when to move your stop. You could use something like a moving average. Experiment with only moving your stop loss if price closes above a certain moving average.

Again, I cannot give you a blanket solution that will work for every trading strategy and every market because there is so much variation.

Therefore, you need to put in the work to figure out what works best for your situation.

Forward Test Your New Strategy

Even if your new strategy looks good in backtesting, it's a very good idea to trade it in a demo account for at least a couple of months.

This will show you how deal psychologically with the ups and downs.

A trading strategy can look good on paper, but may not fit your risk tolerance.

So further testing in live market conditions will help you understand how the change will impact your mindset.

Going Beyond Moving to Breakeven: Trailing Your Stop Loss

Trailing your stop loss means that you move your stop loss to lock in profits as price moves in a profitable direction.

Here's what that looks like on a chart.

In effect, moving your stop loss to breakeven is a type of trailing stop.

However, you can take this one step further and see if you can move your stop loss periodically while the trade is open.

Using the 1R example, you could move your stop loss forward 1R every time price moves another 1R in your favor.

There are also many other techniques and indicators that can be used for this purpose.

Obviously, you should test this method extensively before using it in a real money account.

The only thing to avoid when trailing your stop loss is the default trailing stop loss that many brokers provide.

In my testing and research I have not found a viable use of this type of trailing stop.

Final Thoughts

The bottom line is that you need to test to see if moving your stop loss to breakeven will help or hurt your trading strategy.

Your strategy, market and mindset must be a good fit for this trading strategy.

You may discover that moving the breakeven is not a good fit for you.

But if you stay aware, keep an open mind and work hard, you can figure this out.

Anyone can.

Now go test some ideas! 

The post Move Your Stop Loss to Breakeven: Why, When and How to Do It appeared first on Trading Heroes.