Profit Target Strategies for Absorption-Based Trades

Setup Description

Once you have entered an absorption-based trade, the next step is to determine your profit target. This is an important decision that can have a significant impact on your overall profitability. There are a number of different profit target strategies that can be used with absorption setups. The best strategy for you will depend on your individual trading style and risk tolerance.

One of the most common profit target strategies is to target the next key support or resistance level. This is a logical approach, as these are levels where the price is likely to encounter some selling or buying pressure. Another common strategy is to use a measured move. This involves measuring the height of the previous trend and projecting it from the entry point.

Finally, you can also use an R-multiple of your risk to determine your profit target. This involves setting a profit target that is a multiple of your risk. For example, if you are risking 1R on a trade, you could set a profit target of 2R or 3R. This is a simple and effective way to manage your risk and maximize your profits.

Entry Rules

• Identify a high-probability absorption setup.
• Enter the trade on a confirmation signal.

Exit Rules

• Set a profit target using one of the methods described above.
• Use a trailing stop to protect your profits.
• Exit on a sign of weakness, such as a bearish divergence on the cumulative delta.

Profit Target Placement

• Target the next key support or resistance level.
• Use a measured move based on the height of the previous trend.
• Use an R-multiple of your risk.

Stop Loss Placement

• Place your stop loss below the key support level (for a long trade) or above the key resistance level (for a short trade).
• Use an ATR-based stop loss.

Risk Control

• Risk no more than 1-2% of your account on any single trade.
• Use a daily loss limit to protect your capital.
• Be aware of correlation risk if you are trading multiple instruments.

Money Management

• Use a position sizing formula to determine the appropriate position size for each trade.
• Consider scaling in or out of your trades to manage your risk and maximize your profits.
• Monitor your portfolio heat to ensure that you are not over-leveraged.

Edge Definition

By using a sound profit target strategy, you can significantly improve your chances of success with absorption setups. The win rate for this setup is typically in the range of 60-70%, with a profit factor of 2.0 or higher.