When I calculate Reward:Risk Ratio. I always stuck in how to figure out the target price.
For example, look at this chart.
1. entry from pivot low at 7.1
2. placed sell stop at 5.9 (under pivot low)
3. my Risk/Share = 1.2
4. Identify target price. Here comes the hardest part I will divide it to 2 scenarios.
I guessed that it will return to top again.
Reward = 12-7.1 = 4.9
Reward : Risk = 4 : 1
I found that at 9.0 is a strong base before break down. Then I think that it will return to 9.0.
Reward = 9.0-7.1 = 1.9
Reward : Risk = 1.6 : 1
Only the pessimistic scenario make sense for me. Then I skip this trade because the reward:risk is not more than 3:1.
But things don't always work out the way we want them to. I figured out that this reward:risk system frequently prevent me from good trade ( 5R or more) and many pessimistic scenario turned out to be homerun.
Then I think that Reward:Risk system is useless for me or I can't figure the most probable reward.
If you have any method to determine the price target (eg. fibonacci projection, Elliot Wave etc). Please suggest. Thank you.