(06/08/09) How I Set Stops and Profit Targets (Part 1)

The US dollar has been in a freefall against the Canadian dollar. Although I have a long-term core position in this currency pair, I also like to take shorter-term trades. Many traders find it difficult to find entries in strongly trending markets, so I wrote "How to Catch a Trade in a Vertically-Trending Market" last week to show how to identify a high-probability entry in these types of markets. As I finished the article last week, the position was not closed and I showed several ways to “book” profits, depending on your own trading style. Let me show you how I booked profits in this trade:

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I chose to let my profits run, “boxing in” profits by hiding stop profit orders above each swing high until price finally tested the red, down-sloping Median Line, where I locked in 439 pips of profit. You can view the stop profit orders in part four of "How to Catch a Trade in a Vertically-Trending Market."

Once I have taken my profits, does the fun end there? Of course not! The market is always moving, and I find that if I am patient and attentive, there are lots of trades that come along. An old mentor of mine once told me that if I could learn to successfully trade the “squiggles” inside a trend, there are times when I would be able to make two, three, four, or even five times the profits I would have made if I had simply sold the top and bought the bottom in a long downtrend (the reverse being the case in an uptrend). Not every trader has the ability or the capital to hold longer-term positions, and it should be mentioned that not every trader has the ability to trade the squiggles either, so each trader should find a style that fits their talents—but that is another article, yet to be written!

While preparing to give my live, pre-market charting session, Market Maps, the next morning, I noticed that the US dollar had rallied against the Canadian dollar to test the same down-sloping sliding parallel that I had used to enter the short US dollar/long Canadian dollar position I had just closed out for such a nice profit. As I continued to get ready for the live session, I kept coming back to the Canadian dollar chart. Price was dancing around the down-sloping sliding parallel but it hadn't yet shown me any sign of weakness, and until it did, I wasn't interested in entering a trade.

Then price broke below a swing low, as well as several of the upswing bars, and it was beginning to look like I might get another opportunity to ride this same sled lower again. Let me show you what I saw:

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