So, dear traders, our patience was finally rewarded last week. Copper has provided us an even better opportunity as the price climbed higher to make a deeper retracement and the distance of the drop is now even greater. We started from the $2.75 level, then we moved higher to $2.885, but none of them were activated.
I spotted the famous reversal pattern on the chart, which adds to my structure analysis and I will show it in the chart below.
Let’s go through the trade setup steps again as the entry signal was triggered.
Step 1. Chart Analysis and Step 2. Trading Idea
These steps can be skipped as we already know what we are looking for.
Step 3. Trade Setup
We should prepare a Sell Setup to enter the trade using specific entry, stop and take profit levels. These are the things that make a trade. If you don’t have all three levels in your mind, you better avoid trading as it would become mere gambling.
Identifying Entry Level: Copper Futures 4-Hour Chart
Chart courtesy of tradingview.com
Last time I used the 1-hour chart to show you the entry trigger. It was not activated as the price of copper moved higher. This is why I like this strategy as there is no guessing.
This time the price spent more time in the same higher area and I switched to a bigger 4-hour time frame. We can see here how two consecutive tops (red arcs) peaked at the very same level of $2.977. This shaped a Double Top reversal pattern with a Neckline (the lowest valley between tops) at $2.928.
Most of you are already aware of how to trade this pattern. The entry trigger in the chart above (blue horizontal line) was set at $2.925 (3/10 of a cent below the Neckline). It was executed last Friday as copper futures dipped to the $2.9225 low.
The RSI indicator in the background confirms the entry trigger as after a long-lasting Bearish Divergence it finally broke below the 50 level, and at the same time, the Neckline of a Double Top was breached.
Pain is part of the game as we are only humans and we can be wrong. To limit our risk, we should exit the position according to our trading strategy. I would set the stop-loss order slightly above the highest top ahead of the breakdown of my trigger.
In this trade it should be placed above $2.977, I would put it at $2.985 as it was highlighted in the chart above with the red horizontal line.
I showed you the target in my earlier post. The former low of $1.94 is the main target. I would move it only if the structure changed dramatically.
Your planned profit should exceed predetermined risk; otherwise, there is no reason to trade as statistically even if half of the trades are winners you would end up losing your account.
Our risk expressed in price difference if we put a stop loss at the $2.985 against the entry of $2.925 is equal to $0.06.
Our potential profit is equal to $0.985 ($2.925 - $1.94).
Then the risk/reward ratio is equal to 16! Which is much better than the industry recommended ratio of 2-3.
Step 4. Risk Management
Everyone should follow his own rules in this aspect of trading. Some will risk up to 5-10% percent of their account per each trade; others stick to the 1%. We should just bear in mind one thing – this is not a swing trade or other short-term positioning. The position could take a longer time to play out, but the ratio of 1:16 is very rare, so I would risk here more than 1% up to 5% in contrast with the strict risk approach of 1% per deal for a short term trade.
Please feel free to share your entry, stop, target levels and risk parameters.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.