It is important to identify whether the breakevens of the trade are realistic. When indentifying a trade I run through the following checklist.
- Draw the breakevens on the chart.
- Draw the support and resistance levels on the chart
- Identify the ATR of the underlying asset.
This checklist allows you to see the distance the breakevens are from the share price and if these levels are realistic. Then check if where the next support and resistance levels are. The next resistance should be higher than the upper breakeven and the next support level should be below the lower breakeven.
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