Risk management: how to predict Take Profit in order to have a stable income, then rest easy.

3Сommas Blog
8 min readFeb 25, 2019

How to plan profit margins

Managing funds and risk are important. This reduces the chances of losing your deposit sooner or later. Experience has shown, that not all traders need to manage risks.

All traders can be divided into 3 types

The first group believes that they are able to trade. They trade more or less regularly, determine the direction of the trend perfectly, the entry point and an exit from the market … and that’s all. People from this group sometimes leave trading, if they lose trading capital. But it happens rarely. As a rule, their real prospect is not to make money from trading. Instead of growth of the sum in their accounts, they see plus or minus the same sum with which they’ve come. If they get tired of it, they give up trading thinking “you need something more stable”.

Traders from the next group think that the fund management and risk management are boring. They entered the trading for the thrill, “play”, collect entertaining stories. If you are a part of this group, well, you should not read further). You should be prepared for the fact that sooner or later you will lose money and quit the trade too, and the only difference is that you will say other words). If this happens, try not to say that trading and cryptocurrencies are stupid and fraud). We respect the right of everyone to believe in their fairy tales, for example, in dreams to hit the jackpot). With all due respect, the cryptocurrency casino is not a suitable target for loans or debts.

The third group of traders consists of those who consider trading as a business. They are ready to acquire specific skills, understand the nuances, plan, adhere to the rules, calculate the risks, and take them into account in their budgets. This and the next block of blogposts are for you.

Risk management can be divided into 3 parts:

  1. Take Profit and Stop Loss;
  2. Position Volume. Potential risk ratio;
  3. Risk management rules implementation.

Today we will talk about pleasant things: how to plan the amount of profit per each transaction.

  • By the way, it’s important to determine to Take Profit and Stop Loss before you open a position in the market.

Put TP and SL, or no, it’s your business. But it is very important to understand how they should be put. Then you’ll be able to predict at what moment, and how a part of the market will behave.

As you know, TP and SL are two marks. TP is a target that the market can reach before a turn if it moves in “your” direction. SL is the opposite point, the size of the loss that you can afford, it shows that you are mistaken with the direction. These two marks you choose. If the market reaches one of these points, your position closes automatically.

Take Profit and Stop Loss are determined by the properties of the support and resistance levels.

  • Property number 1: the direction of the breakdown indicates the potential direction of the market;
  • Property number 2: the price has a great chance to beat off the level than pierce it;
  • Mirror property: after piercing, the levels can change their roles.

TP while entering the trend turning point

The market slid down for a long time, and finally pierced the extreme resistance level: the price has overcome it from the bottom up. A purchase signal is formed.

Let’s see the place to establish the most favorable exit points in case the price continues to grow.

You need to know the opinion of other traders. We need to find correctly where do they plan to exit the market if the price continues to grow. Attention: we don’t need a top-secret nuance. It is required to understand where the majority will exit the market and, therefore, the ratio among buyers and sellers will change.

In the previous posts, we have shown that traders close positions approximately in the same situations, indicated by support and resistance levels.

In order to determine Take Profit, you need to build the nearest resistance level on the timeframe where we trade:

If the market moves for a long time in one direction, and then turns, a new trend can form at the turning point. It is quite normal to have an optimistic mood and set an optimistic Take Profit. However, it is important to remember that your optimism should be supported by arguments.

  • It is important to be able to distinguish optimism from hope and desire to earn a specific amount. Hope and “today I want to make money on the X money market” mood will kill your trading sum. Goals that don’t suit the real market situation do not work. Trader’s wishes rarely coincide with the goals of the most part of market participants, as they rarely correspond to support and resistance levels. Wishing to earn a specific amount, the trader puts TP too far, the market does not naturally reach this mark, turns, and goes against the trader. As a result, even if the trader manages to take profits, it contains correction costs, which were avoided by more pragmatic market participants.
  • In our example, we assume that the market map was implemented on your chart.

Let’s see what the next levels show.

The nearest three resistance levels are usually enough to assess how far the market can actually go. However, if the nearest three levels are the same, you can take into consideration the following: the fourth, fifth, etc.

Your chart will have levels of a longer timeframe. As a rule, they will be outside the levels of your working timeframe:

What level mark, the first, second, third or even the level of a longer timeframe, to choose as a target?

Entering the market at the turning point, and the potential start of a new trend, you never know in advance how active this trend will be, and whether it will take place at all. But you should not predict.

Choose from a justified optimism. Focus on goals from the second, third level or the level of a longer timeframe.

TP in the middle or at the end of the trend, or what awaits you if you enter at the very beginning.

As you know, there are three stages of the trend. If not, then you will not believe: the beginning, the middle and the end, if it starts to decline and stops.

Let’s examine how to set a goal if you’ve entered after the first stage.

By the way, sorry for the captain obvious, but it turns out, that for someone it is new info. If you are lucky enough to open a position on a turn, be prepared for a non-linear price movement:

Although you would like to move only forward and upward. But no.

Remember that near each resistance level the market will slow down, a correction will start, the price may fluctuate for a while. It’s all right.

In our example, reaching the first level, the market may be uncertain for some time. If you initially set Take Profit in the area of ​​subsequent levels, the second, third or even longer timeframe, then it is important that you are ready for such turn, and do not panic. If in such situations you suffer, reduce the volume of the position, or put the goal closer. Enjoy the process and the result, not stress 🙂.

In case of a pronounced trend, one after another, signals work, confirming the trend:

And now you see the fourth or fifth upwards signal, now close to the resistance level of a longer timeframe. In such a situation, it will be a goal.

  • If you enter during a trend, when a train rushes at a full speed, you shouldn’t be optimistic. Optimism in trading works if you enter at the beginning of a trend. After a long price movement in one direction, there are no reasons to make global plans.

In this case, the objective goal will be in the area of ​​the resistance level of a longer timeframe. The fact that the line of the longer timeframe is coming — this is really important. In this area, flat, triangles, turnings can take periods of time proportional to the timeframe. As you remember, until the market pierces the level, it is impossible to predict what will happen next, so near the lines, some traders leave the market.

In such a situation, you may not be satisfied with the profit potential. This is OK. Give up the deal.

You should remember:

  1. A big mistake is to set goals with a question: “How much do I want to earn from this deal?”
  2. The main thing is to determine the point where most traders will close part or all of their positions.
  3. Objective profit calculation criteria form support and resistance lines, built on all timeframes from the longest one to your working timeframe.
  4. The goal must be set before opening a position.
  5. You can skip setting TP, but understanding where it stands in front of a non-zero number of market participants, it will allow you to predict adequately.
  6. In order to determine to Take Profit market, the first step is to build the nearest resistance level.
  7. Then you need to implement the previous resistance levels.
  8. This is despite the fact that the market map you have already implemented).
  9. If you enter during the trend forming point, you have a great chance to an optimistic forecast. But they should be based on adequate facts, according to the specific market situation. Focus on goals from the second, third level or the level of a longer timeframe.
  10. Price moves non-linearly. Pursuing the goal, it will slow down several times, roll back, turn into a sideways movement. If this is too stressful for you, reduce the volume of the transaction, or put the goal closer.
  11. If you enter when the trend has long been formed and was confirmed by signals several times, do not hope for big profits. There are no reasons to build global plans.
  12. If you are not satisfied with the profit potential, skip the deal.

In the following posts, you will learn how to check your goals, improve their accuracy, ways to limit risks and to set Stop Loss.

Stay tuned. Visit 3commas, and practice everything that you have learned today, otherwise it will be hard to catch up.