Good Morning
Let’s go through a couple of examples of how I determine my
risk reward on Trades I have taken recently using both a day trade and swing
trade as examples.
The first is a day trade that I took this Friday. IG had a
nice pennant breakout the day prior on big volume off of 20ema support from a
press release. What I was hoping for was a red to green move the following day after
the open or a gap and go setup. We got a red to green. The market was in bounce
mode and the previous day’s resistance was in the 8.90 range just below the 9
dolla holla, which if you follow me, you know I love round number rolls. My
alert was set for 8.84 but I didn’t need it since I was watching it for the
open. The white chart is my Scottrade elite chart 5 minute 2 day chart. I have
MACD Volume and Pivot points along with the VWAP and 10 and 20 EMA. I wanted it
@ 8.85 but could not get my fill so I took it @ 8.88 limit order. I had my
mental stop 8.76 so my risk was 12 cents my first target was the pivot @9.34. That
target was hit where I scaled half my position. The next target to scale was
9.50 and a lotto target of 9.93. I closed out the second half of the trade @
9.22. The stock could still be in play Monday however, my lack of conviction in
the health of the market made me feel the best course of action was to close
out the trade and lock in profit. So risk was 12 cents and reward to my first
target was .46 cents reward. Nearly a 4 to 1 risk reward ratio. Had the stock
hit my second target @ 9.50 it was 5 to 1. The lotto target nearly 9 to 1. Very
favorable, clearly defined risk reward ratio and even though I did not hit all
my targets it was still a nice trade.
Figure 34 Scottrade Elite chart 5
minute 2day With MACD VOLUME PIVOT VWAP 10 EMA and 20EMA
Figure 35 Daily, 30 minute and 5 minute
TC2000 time frames
The second example is a starter swing position. When I take
a swing I have more leeway with my stop since my time horizon is longer. HERO
looked good to me on multiple time frames to start building a position. There
has been recent insider buying @ 3.17 the candle was out of the lower BB and it
was testing a multi-year low so I felt I had some relatively strong support. My
entry was 2.23 my stop OR potential add to my swing is 1.98. My first target to
scale is 2.63 second is 2.90 and 3rd is 3.11. If it were to take out
3.11 on high volume I would hold a few for the lotto play and let them run
raising my stop along the way. I have not sold any shares as of yet but will
scale a few if I hit my first target. There is potential for a snapback play in
the stock and snapbacks can be really powerful. The nice thing about this trade
is I can also take it for a day trade if the move is powerful enough. Since it’s
in my swing account and I have alerts set for targets I can scale out and take
some profit while at the same time deciding if I want to take it for a day
trade in my trading account. On my swing if I were to stop out @ 1.98 I am
risking .25 cents to make .40 for my first target, .67 second target, 88 cents
on my third target. Risk reward to first target not ideal only 1.6 to 1 but as
I said I have more tolerance with swings. If it were to fall to 1.98 I would
consider adding to my position and bringing down my dollar cost average. My
second target gets more favorable @ 2.68 to 1 and my third target 3.5 to 1.
There are several factors for me to consider before adding to my swing like
market conditions, company specific news, volume, Stochastic, MACD on the daily
and the weekly charts. As of today I am up on the trade but it is yet to be
determined whether or not it will be a winning trade.
Figure 36 HERO Weekly time frame
Figure 37 HERO daily time frame
Figure 38 HERO Daily,30 minute and 5
minute time frames
The more prepared you are with your plan on risk reward the less likely you are to react with emotion. This is not to say that something drastic can't happen like a halt of the stock and a gap down. That risk is always present but at least there is a plan in place that I can try to adhere too where I have a clear understanding of what I am putting at risk. If HERO were to announce bankruptcy tomorrow I am comfortable with my position size and neither my account or my emotional state will be devastated from the loss.
A good example of this and a good example of why Biothech's are binary event stocks that present both tremendous opportunity as well as tremendous risk.Many traders and investors will not hold Biothech's over night
TXNP which is actually in my video and on my watchlist (you can take take that one off the list : ) failed its mid stage study this morning. The stock is down over 50 percent pre -market. I have a small swing position in the stock and will be looking to unload at some point either today or over the next few days. I was aware of the risk and my position was not large enough to be concerned about. This doesn't mean I enjoy taking a loss. It was a lotto play and it is part of doing business. You are going to have wins and you are going to have losses.
It looks like we are going to have a weak open this morning. I have no desire to try and fight the tape I will be sitting on my hands unless I come across something that is just too compelling to pass up. TZA IWM SPY and TVIX will be on my radar. We could get a red to green open which typically presents some good bounce plays.
Stocks on my radar this morning
.
OMED pr trendline break continuation move, ETRM pr not crazy about the daily but worth watching, , CAK decent daily pr this morning, AMAG pr decent daily, SGEN pr nice daily, ACUR pr possible snap back play but be careful its a pop and flopper, ECYT pr like the daily gapper, LIQD already swinging it, CYTR want the 3 dolla holla off of pr, DWA off of Softbank Rumor, NVGN can be a pop and flopper active premarket,
This weeks Video link in case you missed it
Best of Success!
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