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Planning Your Trade Understanding Reward/Risk Ratios

Planning Your Trade Understanding Reward/Risk Ratios. By: Stacie Shapiro. Planning Your Trade. Do you know what kind of trader you are? Do you have a trade plan? How do you decide whether or not you are going to enter a trade

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Planning Your Trade Understanding Reward/Risk Ratios

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  1. Planning Your TradeUnderstanding Reward/Risk Ratios By: Stacie Shapiro

  2. Planning Your Trade • Do you know what kind of trader you are? • Do you have a trade plan? • How do you decide whether or not you are going to enter a trade • Do you get into a trade and then figure out your stop and where you plan to take profits • Do you trade what you think or what the chart tells you? • Earnings reports: RVBD, FTNT • Loving the company: TZOO, FFIV • Chinese stocks: RINO, YUII, SINO • Do you know exactly what you are willing to risk on every trade and what you expect to make • Some momentum scalp traders don’t use reward:risk

  3. What is Reward/Risk • A calculation by how much you are willing to risk on the trade in order to make your target amount • Many ways to base this calculation • Measured moves based on chart patterns • Moving averages • Trend lines • Gap windows, etc…. • What is the minimum reward:risk you are willing to accept • Does it make sense to do bracket scalps – risk 10 cents to make 10 cents? Oftentimes there are several resistance levels so you have to have a starting reference point. For example jumping a trade and entering right under a trendline or moving average

  4. Calculation • Entry price 100 • Expected Target 105 • Stop loss used 2 pts • Reward: 105-100 = 5 points • Risk: 2 points • Reward /Risk: 5 divided by 2 or 2.5

  5. Enter: 44 Stop: 47.5 Target: 37 Reward: 10 points Risk: 2.5 Reward/Risk 4:1

  6. Enter: 15.85 Stop: 15.50 (right below 50 ma) Target: 16.75 (height of triangle .9 + breakout point) Reward: .9 Risk: .35 Reward/Risk: 2.5 Note can also add above the 16.15 for continuation

  7. GAP FILL Enter: 117 Stop: 116.75 Target 1: 119 Reward: 2 points Risk: .25 Reward to Risk ratio: 8:1

  8. Enter: 39 Stop: 37 Target: 45.2 (height of wedge is 6.2 points add to breakout of 39) Reward: 6.2 Risk: 2 Reward/Risk: 3

  9. Day Trade Have to know levels on all time frames, daily, 60 , 30 etc… On the daily there is resistance at the 20 moving average (154.3) and 2 trendlines

  10. Thursday the stock opened above the 20 ma daily • It had to clear the resistance of previous day to be a buy at 158.5 • I set my stop at 157.4 (below the body of the candle that I entered on) • First resistance is 162.4 from my daily • Expected reward: about 2 points • Risk about one point so 2: 1 • This trade actually went a lot higher so scaled in and out- but expectation can only really be first level of resistance as there is no measured pattern

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