Getting Closer
The Market Tale (Oct 03, 2019)
“There you go! An upside breakout on low timeframe — it might get us above the recent highs,” said Bull triumphantly. He longed 8309.5 as predicted in the previous review.
“The price moved higher indeed, but the momentum slowed down, and now we’re retesting 8309.5 again.” remarked Bear, looking at the recent chart.
“That’s just a retest,” said Bull. “I understand why the current price action is sluggish: we had a non-stop uptrend recently, so some traders are still counting on a deeper retrace.”
“I wouldn’t, after the recent upside breakout.”
“Why not?”
“See, we have two possibilities: 1) An uptrend continuation 2) An uptrend rejection. If uptrend continuation is going to happen, it’ll start from this price level, without deeper retrace. A retrace below 8217.5 by itself is a signal for uptrend rejection, so traders who want to buy “just a little lower” will get royally screwed.”
“Yeah, the chart will look like a good short opportunity, so sellers will pile in.”
“Also, the risk-reward ratio will be pretty good for shorts.”
“Why?”
“Because the next support is at 7736. Suppose we break down from here. The recent upside rejection was at 8385.5. Shorting at the break of 8217.5, with a stop at 8385.5 and a target at 7736 would give us a risk of (8385.5–8217.5)/8217.5 ~ 2.0%, and a reward of (8217.5–7736)/8217.5 ~ 5.8%. Risk-reward is 5.8% / 2.0% = 2.9, which is very close to recommended ratio of 3. And that’s minimum risk-reward! Imagine if BTC goes even lower, which is quite probable if that support at 7736 gets tested for a third time.”
“So this favorable risk-reward ratio will tempt the traders to short.”
“That’s right — but only if 8217.5 breaks. Let’s see.”
“And what about uptrend continuation?”
“Above 8385.5.”
“Got it.”
Previous episode: The Decision Point
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