Risk Vs. Reward or How to Trade with a PLAN!

by akos on January 7, 2015

ONLY TRADE THE PLAN

Guys, I can’t stress the importance of having a plan BEFORE you take a trade.

(THIS IS THE CHATROOM I’M IN RIGHT NOW. BTW THIS IS THE BEST ROOM ON THE NET. PERIOD). 

That’s what separates losers from winners (only 10% of traders are profitable).

If you want to be in that top 10% you really have to know what your risk is and what your reward could be at each trade you’re about to play.

I remember when I started out I just went into a trade with absolutely no idea what my entry should be ( in fact I bought breakouts and not dips when going long), where I’d cut my losses where would I add and where would I take profits. I was pretty much playing lottery. Bought a ticket and crossed my fingers hoping for the best.

The problem with this type of trading that it is REACTIVE and based on emotions.

The stock market is human emotions on display.

But when  you have a plan – and you follow that plan and rules- YOU TAKE THE EMOTION OUT OF THE GAME. THAT’S WHAT SEPARATES WINNING TRADERS from LOSERS.

Cut your emotions out of the game and you will be a profitable trader. End of story. You become like a computer that plays the odds systematically.

Risk Vs Reward

Take a look at the chart below!

Perfect example of a decent Risk Vs Reward ratio.

This is $MOC from yesterday.

Click the pic to blow it up to see what’s what!

MOC_1

 

As you can see I put out a tweet saying that I’m buying this dip at $2.90, putting risk at $2.80 which was pretty tight.

I loved the 1-minute chart of $MOC.
Morning run, holds the gain then run again, then a pullback flattens out and holds that channel between $2.80 and $3.00.
Me going long was an ANTICIPATION OF A MOVE, hoping that it would break that channel on high volume. The support was at $2.83-ish so I was like: if this thing breaks $2.80 it is going to flush and I DON’T WANNA BE IN IT when the shit hits the fan. So I risked $.10 max.

I was thinking that if it ramps it would either go to HOD or put in another top or at least go pretty close to it.

I wanted to take half of it off (nail the gain while you have it) so the rest could go on house money).

The last minute I decided to take it ALL off, which I did a bit below the second top.

You can never go broke by taking profits.

Later that day it did exactly the same pattern but it was much smaller.

My reward was at least $.40

Which makes it a great play with at 1:4 risk vs reward ratio.

This is super important!

 

The main idea is that when you have a plan YOU TELL THE STOCK TO SHAPE THE CHART A CERTAIN WAY. AND IF IT THE CHART DOESN’T DO WHAT YOU EXPECT  YOU WALK AWAY FROM THAT TRADE WITHOUT TRYING TO FORCE IT.

I hope it helps to clarify how I set up my trading when going long.

By the way, this system also works for shorts.

cheers

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