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 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

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

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

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

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

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

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

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

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