The Basics of Trading

This is a discussion on The Basics of Trading within the First Steps forums, part of the Reception category; Hi Paul102 Yep, I'll put up my analysis in a day or 2 (so everyone can have a laugh ). ...

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Old Jan 27, 2003, 8:31am   #8
 
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FTSE Beater started this thread Hi Paul102

Yep, I'll put up my analysis in a day or 2 (so everyone can have a laugh ). I want to give as many people as possible the chance to share their analysis first.

The next thing I was going to talk about is the risk / reward factor and money management side of trading, but JonnyT, if you want to start a new thread on risk / reward that would be great.
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Old Jan 27, 2003, 3:36pm   #9
 
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Difficult situation at the moment, with IRAQ and the Blix report.
without that I would wait for a clear candlestick to print and enter long, looking to 940 for my exit,
at the same time watching how the ftsie100 is acting as this share follows it quite closely.
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Old Jan 27, 2003, 11:18pm   #10
 
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Hi FTSE Beater

Would be great if you gave an explanation of the risk/reward ratio as I have been giving this some thought since JonnyT mentioned it.

As I see it, the previous lesson explains one way of calculating the reward. The risk is determined by where you place your stop and knowing where to place your stop is possibly lesson 3 But I guess your stop position has to be based upon the volatility of the stock you are trading. Obviously you cannot just place your stop anywhere that makes your risk/reward ratio look good because then you run the unmanaged risk of your stop being triggered and losing money.


Regards,

Paul
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Old Jan 28, 2003, 8:25am   #11
 
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FTSE Beater started this thread Hi Paul102

This is brilliant. I was thinking it was going to take me ages to think up the lessons for the weeks ahead, but it looks like you've planned them for me

I'll put my analysis up tonight
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Old Jan 28, 2003, 9:13am   #12
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Risk Reward Ratio

Hi All,

I hope that you dont mind me contributing to this discussion. For risk reward ratio another factor that is critically important is "Percentage of successful trades"

For example
1) If you have a trading system or method that gives you a 50% success rate and

2) You get a 2:1 reward to risk (ie. for every trade you win you make 4 points whereas for every trade you lose you lose 2 points) and

3) You trade the FTSE 100 future at 10 per point

Then, on average, for every 10 trades you make you will have the following scenario

(10 trades) x (50%win) x (4 points x 10) - (10 trades) x (50% lose) x (2 points x 10) = 100 profit

But if your percentage of successful trades drops by just 10% to 40% the picture changes as follows:

(10 trades) x (40%win) x (4 points x 10) - (10 trades) x (60% lose) x (2 points x 10) = 40 profit

A very different picture and if your percentage of successful trades drops to 30% then this would change to a loss of 20

This is why I think that backtesting systems over a long period is important as it will give you a more accurate percentage of successful trades that you can expect to achieve and as such adjust your targetted reward to risk ratio.

Just a thought


Paul
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Old Jan 28, 2003, 9:48am   #13
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Bill G
Thanks Bill I am looking for some chart examples like the one you posted to get the hang of risk reward entry to trade.Your chart shows a pull back to 870 with a risk of 50 points to 820 and a reward of 70 points. Have I got it correct ?.
What do you mean by candlestick to print.?
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Old Jan 28, 2003, 1:38pm   #14
 
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Are you referring to the support of 820 set at 11 Dec? I think a more genuine support would be 853 as shown by the P&F chart .
920 would be my resistance.
The clear candle is a long open bull type candle `print` (showing up on the chart)
Hope this is a bit more clear.
Bill
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