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. color=orange Quick Chart Lesson: Risk vs. Reward

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	ClayTrader			Saturday, March 08, 2008 1:16:11 PM
	Re: None			Post # of 48499

.<font color=orange>** Quick Chart Lesson: Risk vs. Reward **

I want to go over a trade I entered a couple weeks ago on 2/27/08. I added TWM to the Charts Are Coooool iBox on 2/22/08 -- http://investorshub.advfn.com/boards/board.asp?board_id=8765

By going over my rationale, it will provide a good example of managing risk vs reward via charts. Risk vs. Reward is a HUGE concept that must be grasped in order to become consistent in profit making.

I added TWM as a 'Pattern Play' because I liked the ascending triangle pattern that was forming. On 2/27/08 I entered the play at $77.85. But why? That's simple, because of the risk vs. reward set-up.

I entered at $77.85 because that is where the lower support trendline is (seen at the blue circle on chart below). Looking for a previous low, you see $75.76 (tan circle). Because this is a previous low, it is an important support level. Therefore, I put my stop-loss slightly beneath it at $75.50. The next trendline resistance isn't until $87.50 (white circle), so that was my price target. Now let's run some numbers:

Let's say it is a losing trade for me, and I get 'stopped out'. I would lose 3.02% on the trade.

Let's say it is a winning trade, and I hit my target. I would gain 12.40% on the trade.

The risk vs reward: lose 3% vs gain 12%.

As you can see by the numbers, this is a trade that is totally in your favor. If it goes bad, and you lose, it's only 3%, but if it goes according to plan, BOOOOM: 12% gain.

I am still currently in the trade. I sold 3/4th of my position at $87.50 and am letting the remainder of it ride with a trailing stop at the moment.

Always be on the lookout for these sorts of trades. If you find yourself risking (as an example) 3% in order to make 5%, then MOVE ON... it is not a good trade set-up and not worth it!!!