Adam & Eve Tops
Anticipating  A Selloff
Andrews Pitch Fork
Bid-Ask
Bilateral Trade Setups
Bollinger Bands
Bottoms
Breakouts
Breakout Trading
Canslim
ClearAir
Comp. Relative Strength
Cup With Handle
Cutting Loses
Daily Range
Declines
Exit Strategies
Exploring Market Physics
Dow and Elliot Waves
False Breakouts and Whipsaws
Flags and Pennants
5 Fibonacci Tricks
Finding Stocks
Fun With Fibonacci
Gaps
Greed and Fear
Highs
Low Down On Bottoms
Market Timing
Head and Shoulders
Hell's Triangle
Momentum Cycles
Momentum Trading
Morning Gap Strategies
Moving Average Crossovers
Overbought/Oversold
Pattern Failure
Pitfalls Of Selling Short
Playing Failed Patterns
Point and Figure
Pull Back Day Trading
Risk/Reward
Reversals
Selling Declines
Stochastics
Scanning Tips
Stage Analysis
Surviving Bear Markets
The Big W
Tale Of The Tape
Tape Reading
Time Trading
The Gap Primer
Tops
Trailing Stops
Trading Execution Zone
Triangle Trading
Trend Waves
Trend Direction and Timing
Trends
The Profitable Trader
Uncharted Territory
Williams %R
Wedges and Volume
20 Golden Rules
20 Rules For Trade Execution
20 Rules To Stop Losing Money
5 Wave Decline
3-D Trade Execution
Voodoo Trading

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Measuring Reward: Risk

 

Why do great trade setups fail, while lousy ones move in our favor? The answer is quite simple, yet frustrating. Trading is an odds game, in which anything can happen at any time. Price will go where price wants to go, no matter how hard we hit the books, study the charts or pray to the deities. So rather than searching for the perfect trade, we're better off learning to control risk first.
You've forgotten the nature of risk if you can answer "yes" to any of the following questions. Do you still buy "how-to" books, even though you've traded for years? Do you sit in bad losses because you hate to be wrong? Do you reject market wisdom because you lost money trading it? Measure reward:risk before taking a trade, and let it guide your open position. Price close to good support identifies a low-risk long setup. Price close to substantial resistance identifies a low-risk short sale. The distance between your trade entry and the next obstacle within your holding period measures the reward, and intended exit.
The distance between the entry and the price that breaks the trade points to the risk, and unintended exit. Put the odds firmly in your favor by only taking trades with high reward, and low risk.  The best swing trades exit in wild times, just as advancing price approaches a strong barrier. Reward planning seeks discovery of this price before trade entry. This profit target sits at a level where risk will increase dramatically when price reaches it. Traders should exit immediately once this profit target is struck, or at least place a stop that locks in profit, in case of a reversal.

 

Every setup has a price that busts the trade. The safest trades need only a small move to signal a bad outcome, and the need to jump ship. This loss target changes dynamically after entry. Consider the impact of the last price bar on evolving reward:risk, and adjust the plan accordingly. Many traders find it difficult to absorb new information quickly. So they're better off sticking with the original plan, and using trailing stops to protect the position.

How do you know the price that kills the trade? You'll find it at the convergence of support-resistance boundaries on your setup. These usually turn up through combinations of violated moving averages, broken patterns and filled gaps. Every situation is different, so finding the loss target may require all of your trading skills.

 

Exit swing trades to book profits, take losses or close mediocre positions. A good exit is more valuable than a great entry. Emotions usually run high at both reward and risk targets. So take a deep breath and clear the mind before closing out a position.

Tips on Reward:Risk Management

- Watch the clock and become a market survivor. Market cycles affect price movement in many ways.

- Exploit market quirks in your entries and exits. Events like overnight gaps and options expiration can benefit positions, rather than hurt them.

- Enter smaller trades when signals don't line up well.
Good timing on bad stocks makes more money than bad timing on good stocks.

- The best signals converge through many different types of technical analysis.

- Use common sense and good mathematics in your profit and loss projections.

- The most profitable entries and exits come when the crowd is leaning the wrong way.