We have three different “classifications” of trade, based on how many layers of support/resistance exist between the current market level
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and our no-touch barrier. The three classifications are “higher-risk”, “medium-risk” and “lower-risk”.
• For a higher-risk trade, the no-touch barrier is placed just past the confluence of support/resistance levels where the trade itself set up.
• For a medium-risk trade, the no-touch barrier is placed just past the first additional confluence of support/resistance levels you can identify.
• For a lower-risk trade, the no-touch barrier is placed just past the second additional confluence of support/resistance levels you can identify.
The names “higher-risk” and “medium-risk” are slight misnomers in the sense that these are all low-risk trades—regardless of the classification these are all trades that the market won’t move one way, when all the indications are that it will move the other.
While they are all low risk trades, the difference between them is simply how low the level of risk is—how many layers of support or resistance exist between the current market and your no-touch barrier.
The best way to illustrate this concept is with a simple diagram:
This diagram is a simplified representation of what you could do when a bearish trade signal sets up. While this example covers a bearish trade signal you would simply do the opposite if it were a bullish trade signal.
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The black line represents the market itself, and the pink shaded areas represent “confluences” of resistance that we have previously identified by going through the process outlined in the previous chapter.
We have three options when it comes to deciding where to place our no touch barrier.
The first option would be to go for a higher-risk trade, and to do that we would place our no-touch barrier just past the confluence of resistance levels where the trade itself set up. The advantages of placing a higher-risk trade are fairly obvious, in that because the level of risk is higher, the potential returns are higher. This allows you to make more money from each trade, or to make the same amount of money as you can on the other types of trade while risking less, which is handy if you’re starting out from a fairly low capital base. The disadvantage of higher-risk trades is that the success rate is lower than the other two, because you effectively have no “insurance” against the market moving strongly against you. If the market does move away from the resistance area, the trade will be a winner, and it will also be a winner if the market consolidates around that area. But if the market does move higher, and break through the resistance level, then your trade is at risk of losing.
The second option is the medium-risk trade which is, as you might expect, the best of both worlds. You can make more money on each trade than with the lower-risk option, or similar money but with less capital at risk, but you do also effectively have insurance against an unexpected move against you. Even if the market moves higher and breaks through the first confluence of resistance levels, it will then have to contend with the second.
The third and final option is the lower-risk trade, which obviously is at the other end of the scale to the higher-risk trade. In order for a lower-risk trade to lose, the market would not only have to move against you in the first place, which is unlikely if you have a clear, confirmed trade signal that checks out on the flowcharts, but it would also have to break through three major confluences of resistance over the course of just five trading days—when all the indications are that it will do the opposite to that. This means that lower-risk trades have a success rate well in excess of 95%—closer to 98% historically, in fact.
This means that you can go on long runs of winning trades for months and months at a time, which is obviously great, both for your account balance and for your psychology. Obviously, the disadvantage of
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the lower risk trades compared to the other two types is the lower return, meaning that you have to employ more capital to get the same returns as with the other two, but that ties in with what we discussed all the way back in chapter 2 with the example of trading on a non-league football team to not beat Liverpool, in that it’s acceptable to take on that extra risk when the odds are so stacked in your favour.
You will find that not every trade signal is as straightforward as this example. Sometimes, for example, you will find that you can’t do the lower risk trades, and in some rare cases you’ll find that you can’t do the medium-risk trades either. This happens when the additional confluences of support or resistance that you identify are too far away from the area where the trade signal itself is setting up. If we were unable to place a lower-risk trade on a particular trade setup, we’d look to place a medium-risk trade instead. On the rare occasions that we’re unable to place a medium-risk trade either, we’d look to place a higher-risk trade.
It is, however, acceptable to take these different levels of risk when you’re trading because we’ll be employing a sensible system of money management, which means that the higher the level of risk you take with a trade, the less capital you employ, while still being able to generate good returns, and you’ll be learning all about that in the next chapter.
This means that we can be very flexible in our approach and it’s very rare that we have to pass on a trading opportunity because we’re unable to get a no-touch level that we’re happy with (which, if you remember, is one of the questions on the trade flowchart). It’s very rare that we have to answer “no” to that question because by being able to take varying levels of risk depending on how the support/resistance levels are set up, we can easily adapt to the individual conditions of each trade.
Each confluence of support/resistance levels between the current market rate and our no-touch barrier adds in more “insurance” against an unexpected move against you in the market, and means a greater chance of success—with the trade-off being that the more chance of success you have with a trade, the lower the potential return, and the greater the amount of capital required.
This flexibility means not only can you act on virtually every trade signal you see, regardless of how the support/resistance levels are shaping up, it also means you can tailor your trading to your own personal level of preferred risk, or your own personal capital level, the amount you have in your trading account.
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