What Is Your Risk/Reward Plan?

How much are you risking?

This is a key question to ask when making a trade and might even be the most important one to ask, as lately, the markets high volatility has created huge price swings.

Take the Retail Sector (XRT) for example.

In just the past 5 trading days XRT reached a new all-time high at $99.24 and now sits with Tuesday’s low at 75.28.

The average 10-day price movement for XRT has gone from $2.47 on 1/25 up to $7.58.

The average range has almost tripled!

Large price swings can create a tough trading environment as the market becomes harder to predict under these circumstances.

Therefore, no matter what type of trader you are, having a solid set of rules is a must.

So, lets jump right in with some simple rules that can help anyone become a more profitable trader.

First, your reward must at least be double the risk.

For example, if you are risking $100 then you would expect to make $200.

Second, once you have reached the amount you originally risked you should not take a loss on the trade going forward.

This means that if you take a trade where you risked $100 and the profit reaches $100 but then comes back down, you would get out at your entry for $0 loss.

You might be bummed that you did not make any money, but at least you didn’t lose any.

Many people take quick profits and either kick themselves if the stock continues higher or congratulate themselves if the price retreats lower, but ultimately this can make trading even more tough as those traders will need to be right more often than not as their risk/reward is now skewed.

The last rule is to choose exactly how much you are willing to risk on a trade and then stick to it.

This is especially important for building consistent profits and to prevent bad trades from wiping out progress from past gains.

Eventually, as you build more capital you might decide to increase your dollar risk, but until then keep things simple and consistent.

1 2
View single page >> |

Disclosure: None. If you'd like more information about the additional free trading education mentioned in ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.