August 30, 2011 at 8:48 am | | Comments 2

Weighing Risk & Reward on Day Trades

A trader on the email list received a recent video I sent out on stops, and came back with these questions:

“Excellent video, please keep sending more.  But how do you determine ‘risk reward ratio?’  Your day trading strategy points to a starting point for a stop loss at 1%, so how do you determine that it has 2-4% of upside potential?”

Great questions!  Here’s how I responded…

For most stocks, a 2-4% intraday move is not out of the norm on any given day (especially lately).  That’s well within the wheelhouse for most stocks I trade, whereas those without the propensity to move I simply ignore and don’t earmark as trade candidates.

When I do run across a stock that’s more volatile, I’ll cut my size in half and give it 2% from entry, and then expect a multiple of that on the top side (so I’m looking for 4-8% on the profit side to offset the risk).

As for knowing if a stock has that ability to move, for me it’s mostly a feel thing since I’ve traded so many stocks over the years and I watch the market every day, so I’m familiar with their movement to that extent.  For anyone who isn’t, even applying a basic indicator such as the ATR (average true range) to a chart will give you an idea of how much that stock moves on a given day.  It doesn’t have to get complicated, but that will allow you to structure your trade (or skip it entirely) based upon typical movement.

How do you determine your risk/reward?

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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  1. Excellent advice, when you cut your position size, you have the same risk in every trade, regardless of the stock daily movement.

  2. Thanks Edmund, glad you found it helpful. Enjoy your weekend!

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