Trade Reward for Risk, Not the Money
Stockscores.com Perspectives for the week ending February 22, 2016
In this week's issue:
In This Week's Issue:
- This Week's Webinar - How to Use the Stockscores Market Scan
- Stockscores' Market Minutes Video - The News is Relative
- Stockscores Trader Training - Trade Reward for Risk, Not the Money
- Stock Features of the Week - Opportunities in Canada?
This Week's Webinar - How to Use the Stockscores Market Scan
Get a demonstration of how to use the Stockscores.com Market Scan tool for position, swing and day trading. Stockscores founder Tyler Bollhorn will describe many of the filters of this tool and how to combine them to identify opportunities in the market.
Thursday Feb 25 6:00 PM PT, 9:00 PM ET
Click here to register for this free event
Stockscores Market Minutes Video - The News is Relative
How a market will react to news can be difficult to predict as it often seems to make no sense. Good news can be met with selling pressure and bad news can lead to the stock going up. This week, I discuss how markets react to news and then provide my regular weekly market analysis.
Click Here to Watch
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Trader Training - Trade Reward for Risk, Not the Money
Traders acknowledge their profitable trades in terms of money made or percentage gain earned. It is far less common to measure the success of a trade by the reward earned for the risk taken. Yet, this is a far better measure of success because it recognizes that not all trades end profitably and it is important to consistently have trades with profits that are greater than the typical loss.
Consider two different traders. The first is profitable on 90% of his trades, making an average of $500 on each. The second is right 70% of the time and also makes an average of $500 on each trade. Most would say that the first trader is better.
But what about the inevitable losses? What if the first trader loses $5000 on the 10% of trades when he is wrong while the second trader limits losses to only $100 on her losing trades, which happen 30% of the time?
We know that the first trader actually loses money over time despite being right 90% of the time. The second trader makes a good profit over a large number of trades because the average profit is five times larger than the average loss.
The risk of the trade is the difference between your entry price and where you plan on taking a loss if the market proves you wrong. Limiting your losses with a price level where you intend to stop the size of the loss is a must for any trading strategy.
The reward of the trade is the difference between your exit and entry prices, assuming you exit at a profit.
So, if you buy a stock at $5 with a stop loss at $4.50 and then exit that trade at $7.50, you have earned a reward for risk of 5 to 1. The risk is $0.50 a share, the reward is $2.50.
Advanced and Pro Members of Stockscores can use the Risk Calculator tool to calculate their Reward for Risk ratio. Free users of Stockscores.com can plot the reward for risk lines on their charts. To do so, first open a chart by entering the symbol in the upper right hand corner of the site.
Next, go in to the Charting tab and enter the entry and stop loss prices in the boxes at the bottom of this tab below Risk/Reward. Click on create chart and the lines will appear.
It is important for all traders, short or long term, to track the Reward for Risk ratios on all of their trades. This metric, combined with success rate, provides a true picture of trading success.
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Traders acknowledge their profitable trades in terms of money made or percentage gain earned. It is far less common to measure the success of a trade by the reward earned for the risk taken. Yet, this is a far better measure of success because it recognizes that not all trades end profitably and it is important to consistently have trades with profits that are greater than the typical loss.
Consider two different traders. The first is profitable on 90% of his trades, making an average of $500 on each. The second is right 70% of the time and also makes an average of $500 on each trade. Most would say that the first trader is better.
But what about the inevitable losses? What if the first trader loses $5000 on the 10% of trades when he is wrong while the second trader limits losses to only $100 on her losing trades, which happen 30% of the time?
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1. T.IPL
Here you can see the head and shoulder bottom pattern with the right shoulder at $20 and now breaking through the neckline of resistance at $23. Very early stage in a long term turnaround but also a high reward potential if it works. Support at $20.
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2. T.PPL
A virtually identical chart as T.IPL on the daily interval so I am showing the weekly chart to highlight the challenge for these stocks, they still need to overcome the long term pessimism. T.PPL is working its way through the long term downward trend line from a rising bottom.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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