How I would plan a trade for a 5x reward-risk ratio

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The commodity I am interested in is corn futures, and I am using the symbol ZC1! on TradingView, which shows the continuous chart for the current month. We are in the middle of what is ostensibly a Wave 3 down. One of the lessons I have learned is to seldom go against the 3rd wave, in the hope that it will end at a Fib projection. But in this particular case, a small risk might be warranted. Take a look at the chart below.

I have circled the nearest Fibonacci projection target at the 161.8% level for Wave 3. Remember that any of these Fib targets are just that. They don’t necessarily mean the market will turn there. But as I said above, there are some reasons why I might take a SMALL punt against the trend.

In the chart you see above, I am looking at the sub-waves inside the pink Wave 3. Sub-wave 3 (in green color) could end at the 138.2% projection of sub-wave 1, and the reason that is interesting is that it is within ¼ of a cent of the previously discussed Wave 3 target .

In the event we get a sub-wave 4, we could reasoable expect that it can correct to the immediately preceding minor wave 4 which lies at 411. Indeed, if we are lucky, it can even go the immediately preceding high at 426, but I don’t want to get excited prematurely because we are in a wave 3 down.

So, when going against the trend, we need to be careful about two things. FIrst, keep the position size low, and second, keep the stop loss quite close by. Yes, we could still lose money, and if you are worried about that, you shouldn’t be trading.

What could be a good stop, then?

As you saw above, I am suggesting 386 as a stop. How did I arrive at that level? When I look at the minor waves inside sub-wave 3 (the Fib lines for these minor waves are in red), I see that a 61.8% measure of the distance from point 0 to point 3 will project the target for the minor wave 5 at 386’4. So, I would place my stop a little distance BELOW that target. Ideally, we want the decline to the buy level to be slow. That means if we GAP down when the market opens, you should sit back and watch. Perhaps it will reach 377, where you can try your luck again, with a stop a few cents under that.

Finally, an important consideration is the reward-to-risk ratio on this trade. If we reach 411, and assuming we decide to exit even at 410, that will result in a profit of 20 (410 minus 390, just to round it off). Your risk is 390 less 386, or 4. So, your RR will be at least 5 times. Most traders are happy to take a trade for a much lower RR.

I am not your financial adviser. This is only for educational purposes. And I hope you visited the sponsor. If not, please scroll up and visit them. You might find something of interest to you!

Cheers.

Ramki Ramakrishnan

PS: I am sure you are aware that I have an online program that teaches you several techniques, such as the one above.