Video Transcript:
Hey everyone, it’s Dale here. In this video, I want to show you a pretty interesting trade that I took earlier today. It wasn’t the best trade of the week, that’s for sure, but it’s very interesting when it comes to stop-loss placement and take-profit decisions. Let me show you. There are a couple of things here that I think you can learn from, or at least that could inspire you.
What you’re looking at is a 30-minute chart of USD/JPY, and the level that I was trading was this red line. It was a short from 155.4. First, let me talk about the reasoning behind this trade and why I entered the short. If you take a look at this strong downtrend area, I used my Volume Profile and identified a significant volume cluster within that downtrend. Volume clusters within a downtrend like this represent strong resistance. They show places where sellers were active as they were pushing the price downwards. The price is supposed to react to those volume clusters, like for example this one here. There was a reaction, and this is how it is supposed to look. I was expecting the same thing to happen with the second volume cluster, this one here.
I had my level at the beginning of that heavy volume zone. Not only was it the beginning of a heavy volume zone, but it was also the beginning of a Fair Value Gap right here, which is a concept from Smart Money trading. I expected the price to bounce from it. That was the logic behind the trade.
As you can see, the price hit the level here and overshot it quite a bit. We’ll get back to why it overshot the level. Then it finally made a reaction, and I was able to make some money. Let me show you how I placed my stop-loss, because I think this is the most interesting part. My number one rule is that I always want to place my stop-loss behind a heavy volume zone. So I looked at this heavy volume zone and wanted to place the stop behind it. That’s why I placed the stop here. This was the stop-loss line. As you can see, the price just missed that stop-loss.
I don’t think that was pure luck. If you look at this area, there were two highs very close to each other, almost at the same price. That formed a failed auction, and the price sometimes likes to test at least one pip above such highs. When I set this stop-loss, I was thinking that there was a risk the market would want to test above those highs, so my stop needed to be placed behind that area. In this case, it was not only behind the failed auction but also behind the heavy volume zone. That’s how I was thinking about it. That’s why the stop wasn’t placed lower, because then it would have been inside the heavy volume zone, which would not make sense, and it would also have been too close to the failed auction, which the price likes to test. As you can see, the price tested that area but then still reacted to the heavy volume zone and finally sold off.
Now let’s talk about the take-profit. I was thinking about how to place it because there was quite a strong barrier standing in the way. As the price was moving toward my short level, this heavy volume zone formed here, and I was afraid the price would react to it. My thought process was that I should quit the trade before the price reacts to this heavy volume cluster. That’s why I exited the trade here. This was my take-profit.
As you can see, this trade was not ideal because I was trading with a negative risk-reward ratio. This was what I was risking, and this was what I was getting. Not ideal. But in cases like this, when a very strong support is standing in the way, and this one was strong, the best approach especially since I entered the trade at night with a limit order while I was asleep is to quit the trade before it reaches that support. That support could potentially push the price back up. Even if this means accepting a negative risk-reward ratio, it’s better to secure a profit and get out of the trade than to watch it turn before your take-profit is hit and end up with a loser.
As you can see, after reaching my take-profit, there was only a small reaction, then the price pushed past that heavy volume zone, and only later there was a bigger reaction. I was afraid of that earlier reaction. It just happened a bit later than expected. Maybe the market first went for liquidity below this low. In any case, the safest approach was to exit the trade where I did, even though it meant a negative risk-reward ratio. I’m not a big fan of negative risk-reward, but in cases like this, it can be the safer option. When the context calls for it, I take it and move on.
That’s why I’d say this wasn’t the best trade of the week, but it was definitely interesting because of the stop-loss placement, the negative risk-reward, and the early take-profit. I hope you found it interesting. If you want to learn more about Volume Profile trading and get access to my custom indicators, visit my website at trader-dale.com. Click “Trading Course and Tools” and it will take you to the page where you can browse my trading education and custom-made tools. Thanks for watching the video. I’ll be looking forward to seeing you next time. Until then, happy trading.
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