What do you do when the pattern of the trade you are in changes to a new one that has a larger PRZ, covering your original stop?
It happened to me a few days ago - I was in a bullish butterfly trade on usdchf H1, when a new, much larger bullish butterfly pattern appeared, with a much larger PRZ that completely enveloped even my previous stop.
It happens often and its not always easy to see what to do. I am not saying this is the best way, necessarily - but here's my take on it. Feel free to email me if you have a different idea.
First, I would want to see if the new pattern is tradeable at all - i.e. where does the stop need to be and what does the target and average entry price need to be such that the RvR (risk v Reward ratio) can be greater than or equal to 1:2. (That's my rule for RvR - yours may be different).
Next - could the entry from the previous trade play any part in the new potential trade? - i.e. is the previous trades entry price somewhere inside the new trades' PRZ? And by using the previous entry price as part of a scale-in, or on its own - can I achieve the required risk/reward ratio of 1:2 in the new trade?
If so - then we're in a brand new trade with the new PRZ, and the stop must now be where it needs to be for the new pattern.
Note: You're not moving your stop on your old trade here - you're entering a brand new trade with a new stop. (we don't move stops, right?)
If the current position cannot play a part in the new trade - then a decision is required.
Leave it to run its course or close it out?
Usually I would like to leave it to run its course - after all, who knows - it may still work out. Or you might be able to get it to breakeven. Thing is - when you entered the original trade you must have already accepted the potential loss. So - if the worst comes to the worst - accept the loss and move on.
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