Risk / Reward


Well-known member
I've heard a lot about using a risk/reward system to limit the amount of losses.
Can anyone explain how this would work, and/or provide an example?


Risk / Reward.A personal view.

If i do 100 trades in a day i'm looking for 25c/30c runs with 12c/15c losses.Risk reward is therefore 2/1.At the end of the day i can print out my trades and as long as i stick roughly to those parameters and my trades are 50/50 in being right or wrong i can make money.

However to carry out this i need to execute my trades on a trading platform where i have no stamp duty and the ability to pay no spread and direct access to be able to take my trades in an instant and also know that i can exit exactly where i want to.Infact as soon as i take the position i 'm monitoring my stop on the Nasdaq level 2 screen and automaticly deciding who i'm going to hit if i exit and what order i'm going to use.At the same time i've probably got my exit order hidden 30c away on island for my profit.Cancelling it at any time if the need arises.

Now if i buy the stock at $63.07 and wish to run it from one whole number to the next i can enter the stock with a scalpers entry and i know i can get out at $62.95.Therefore my risk is 12c.If i can run it to the next whole number with a trailing stop,preferably under the ax,i can possibly make approx 84c on the run therefore my risk reward is 84c/12c ie 7/1 risk reward.

In other words i could try this up to six times and get it wrong and still make money if i got it right on the seventh.However if i had to use a spread betting firm where i paid 20c spreads i'd be a dead duck because every time i had to take a loss i'd loose my risk and also their spread.So it wouldnt work.

Now imagine this i enter the stock just over a whole number , i enter with a scalpers entry and possible 2/1 risk reward.The stock is offered out on island 24c away.It starts running driven by the ax.I cancel my hidden island order and let it run.We go to the next whole number,based on my scalpers 2/1 entry i've now turned it into a 7/1 swing.I've got Nasdaq level 2 so i can see from the action exactly what is happening and if we're going to take out the next whole number and run on.If we do great and my risk reward has just increased again.

Very soon you can see that my initial 12c risk has been turned into perhaps a $2 or $3 profit with a risk reward of 16/1 or maybe 25/1.

The object for me is to plan the trade,pick my entry, know my initial risk reward and possible risk reward,have an outstanding low cost execution system (Nasdaq level 2 direct access) to manage the whole process.But the whole plan started with the thought is the risk reward worth taking the trade.

If i can see the players underneath me when i take the trade i can have confidence that i can get out.If there isnt much liquidity and and i can see my exit could be 30c away then i wont take the trade to make 30c because my risk reward is only1/1,and the odds are not stacked in my favour.I have to see what is realy going on in the market at all times,looking at a graph will not tell me where my risk is.Therefore by using spread betting companies or graphs it is impossible to take scalpers entries for swing trades that give up to 20/1 risk reward for intraday trading.

I hope this helps and perhaps might encourage other traders on the board to let us know their 20/1 risk/ reward intraday strategies.
Just thinking about this a little more.

The initial risk you take has got to be obtainable.Its no good thinking about a 3/1 risk reward trade if your if you are not 99% sure you can get out where you want to.So if you must use spread betting you'll have to work out exactly how much it will cost you to get out.If you follow graphs then you may look at a graph and say thats my risk,but it's your execution system that will give you the exact price you'll get out at.

If you trade Nasdaq level 2 direct access,then initialy when you start you wont be able to take 12c stops so look for 25c stops or more and base your risk on 25c.Also know your stock.If you trade CSCO as a beginner you can take 12c stops and get out,but try it on VRSN and you wont be able to do it.

If its liquidity you want and the ability to realy know your risk and have confidence at getting out there is nothing better in my view than trading the QQQ'S on island with direct access.

Another factor is where youre taking the risk.taking a small risk because an oscillator has just signaled an entry is crazy.Taking a small risk at a key support level is more sensible because it has more chance of bouncing.

It all boils down to being comfortable with the risk youre taking,having the discipline,the skills and the execution system to be as sure as you possibly can that the risk in your plan is completely obtainable.Otherwise you are deluding yourself that your risk reward plan will work.
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Here is another example from friday night on the Nasdaq.

On another thread we were talking about important times of the day on the US market,one of mine is in the area of 7pm GMT.2pm EST

So if they all come back from lunch and decide we can go for an afternnon move it will start at about that time.So its safe to say that its worth looking for a strong stock in a strong sector.For me it was semi's and NVDA.

Nasdaq stocks love trading between whole numbers.So when NVDA held $64 on the level 2 screen in that magic time period with the indicies starting to make their move you have two choices.

The lunch time chop had been as low as $63.6 The scalpers stop on NVDA would have to be 20c/25c away from the action approx $63.8.

If you swing NVDA for the evening you might want to risk $0.5 and try for $1.5 giving a risk reward of 3/1.However if it trades from $64 to $65 its still a 2/1 risk reward trade.So if your comfortable that the index,the sector and the stock are bullish.Your happy that you can definately get out with a $0.5 loss and you can get a brilliant fill with your level 2 screen just over the whole number the trades on.

Now a scalper looks at the same entry just a touch over $64 and says "this is NVDA and it moves,i have true respect for this stock.Where can i get out if i have to?If the answer is 20c/25c away he may say i'll take my scalpers stop but i'm not going to scalp this for a 1/1 risk reward its not worth the trouble.But if i enter it with a scalpers entry and run it to the next whole number the risk reward is4/1.The trades on.

Two different trading styles,two different risk rewards but the same entry.The Nasdaq level 2 screen told me the players were holding the whole number,direct access gave me a brilliant entry on the bid,paying no spread,the stock ran from $64 to $65 in 15 mins.the exit trade was hidden on island just under the resistance that i could see on the screen at whole number.Total profit 93c and approx a 4/1 risk reward trade.

The swing trader would have the option to have taken a profit at the same time for a 2/1 risk reward trade.However he could also elect to trail his stop (which is larger than the scalpers) and try for a larger move which infact would have come off.
Great post Naz!

Buying NVDA on the bid was a great trade... but in some circumstances of great demand the spread often narrows to a penny or two and there are not enough sellers to get you in on the bid before the stock runs... an example would be the 7 minute, $2.50 run that BRCM had from 1.45pm (Eastern Standard Time), or therabouts, on Friday... few sellers, tight spread...

Out of curiousity, what % of the time do you buy bid?

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Risk Reward


Here is a UK example of risk:reward, based on how I used to trade the UK markets before I moved to the US markets (how I miss those days of phoning the broker for trades and doing nightly research!!! ... NOT)

The company in question is Pacific Media... if you enter at the breakout (where the blue dot is), you will see that technical support (the red line) is around 15 cents below your entry... you will see that the chart runs up more than 15 cents, resulting of a risk:reward of more than 1:1.

So if you are using charts and trading the UK (I don't recommend it because of the steep commissions and stamp duties, not to mention the ridiculous spreads), this chart example may help to clarify risk and reward.



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Hi Trader Pattern

I always like taking trades that are holding the whole number and dancing about with indecision between 1c to 12 c over that number,then I'll put a couple of different price bids under the current bid on island at lower prices and see if any get taken during this indecision time.I've hot keyed my key board for buying on the ask and selling on the bid with direct orders to some ECN's.If one is giving a decent price when it comes in tight on the spread i'll take it.My fingers are poised on the keyboard ready to strike in an instant.

At any time i'll cancell any oustanding orders on island.Then when we start the run i'll see how much stock i've been lucky to get and manage the position.Sometimes i only get one fill before the run sometimes up to three.Doing it this way above the whole number during this indecision time i can buy on the bid about 40% of the time.the good thing about buying the ask is that its probably going up,the downside to getting your orders filled on the bid is that it could be the prelude to the stock tanking.
Talking about large spreads on Uk stocks.I traded a UK aim stock this week.I made 20% profit.Yeah not bad........ and gave back 10% of it in the spread.

Does that encourage me to come back from trading the US.Absolutely not.I'm only glad i wasnt spread betting it,with their bit on top i wouldnt have made anything.

Wake up in the UK! start looking after your customers otherwise they'll all see the light and start trading US stocks.

Just out of interest when i traded the UK i once knew a trader who said to me get all your trades out for the last month and try and work out how much you paid in stamp duty and possible spreads.I did that when i was quiet one day and felt sick.I bet many people out there in the UK pay more in spreads and stamp duty than they actualy make themselves.

If your going to have a new years resolution dont procrastinate, check out why some of us ex UK traders go on about trading the US.We got sick and tired about being ripped off in the UK.
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US Trading

Thanks for your posts Naz, I trade UK stocks on a similar basis with CFDs. The large cap stocks (BARC, RBOS, BP etc) have very tight spreads (RBOS often 2p on a 1600p price), and the costs of trading with CFDs (limited to the spread when trading via CMC) make this a potentially profitable methodology.

One of the problems I find is that level 2 does not show all trading in the UK (I was told at a GNI seminar that 40% or more of the volume is not traded via SETS).
Is this situation different in the US ?

I would be interested in trading the US, but, short of moving to a more US - friendly timezone (I am based in London) I will probably be forced to stick to the UK markets.

Interesting posts anyway.