Understanding the Trading Zones
In trading, defining clear zones is crucial for identifying potential entry and exit points. For our strategy, we focus on two significant zones: the buy zone and the sell zone. The buy zone is identified in the lower 20% of the previous day’s price action, while the sell zone occupies the top 20% of the same timeframe. Recognizing these levels helps traders capitalize on market sentiment efficiently.
Integrating the Fair Value Gap
The next step involves the fair value gap, a critical concept in our Pine Script strategy. This gap denotes a price area where the market has not had sufficient trading volume, indicating potential reversals or continuations. When the price enters either the buy zone or the sell zone, our strategy gets triggered. The fair value gap thus acts as a catalyst for making informed trading decisions.
Setting Risk Management Parameters
Effective risk management is vital for sustainable trading. In this strategy, the take profit is set at a range of three candle formations from the entry point, allowing traders to secure potential profits effectively. Conversely, the stop loss is strategically placed at one candle range, minimizing losses in case of unfavorable market movements. This structure provides a balanced risk-to-reward ratio, essential for successful trading.