The Best Technique Professional Traders Use To Enter Orders

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I have no intentions of click baiting any body ever, so believe me when I tell you, this tip literally changed the way I traded for the better.

Most of the experienced traders use this tactic but as beginners its never brought up for some reason.

As a beginner trader or even intermediate trader we often get caught up with what broker to use, how much commissions are going to cost, which setups will be the best etc.

And those are all important factors to go over. But the step I’m going to talk about shocked me because it made so much sense but no a lot of people i followed would really use it.

To cut to the chase….Its Scaling In To Your Position.

Now some will say “OK, I’ve heard of that before, this isn’t new”. I am not here to claim that its new, only that its unspoken about.

Lets talk about why scaling in to your position is so important.

When we are ready to take a position we often think of entering how whole position at the exact price that we want. For example…

“I want to buy 2,000 Shares at $5.00 dollars  for a whole dollar break.” That’s all good and dandy, but the problem with this approach is that the setups that we are use to are not always exact.

So that price could actually go to $5.25 and then go back in your favor. However, most people would usually get shaken out well before it gets to $5.25, since there all in with there size.

I am going to give an example of a trade I did this week where I got stopped out because I couldn’t tolerate the draw down.

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As you can see above, I entered at $13.68 with half of my size because I got F.O.M.O (FEAR.OF.MISSING.OUT.) and wasn’t prepared.

I quickly shoved the order in, and because of that, when the price went against me, I had a big draw down for my position.

So I exited, just for it to top out $.20 cents above my exit and swing back down in my favor.

To make matters worse, it hits my profit target. This would have been a $500 dollar profit minimum, and a $1,000+ dollar profit if I had got my all my size in with a SOLID ENTRY.

Now, how should I have gone about this?

First things first, I should never have dumped half my size into the stock, especially at a price point that wasn’t close to the best price.

I should have started with 100-200 shares max. This would have allowed me to be involved in the trade but not sacrificing so much. I would be able to let the trade play out.

If I was only 200 Shares in and the stock hit 14.08 (where I originally stopped out), I would have been down -$80 dollars instead of -$200 dollars. This would allow me to continue to add as long as the stock was still showing signs of a reversal.

Second thing I would have done differently was start scaling in short on the pops, instead if on that dip. That’s was F.O.M.O (Fear.Of.Missing.Out) will do. All of your rules tend to get thrown out the window.

Remember, Buying dips or shorting pops will add to your profit and reduce your loses. See the post I had on that.

https://traderjournaljourney.wordpress.com/2018/08/30/1-tip-that-will-amplify-your-trading-profits/

Being able to scale in will give you a much better entry most of the time because you have multiple chances to get a better price. That’s the key.

You throw your starter order out, maybe its a good entry, maybe its not. It doesn’t matter, you have 3-5 more tries to get a better price average. That’s the beauty of it.

And because you have multiple tries, you will be less stressed and less tense about entering the position.

This is just the beginning of me speaking about scaling in, that’s how passionate I am about it.

Take care for now, and I hope this helped!

If you have any questions, feel free to leave a question in the comments, or email me.

Have A wonderful day!!

 

 

 

 

1 Tip That Will Amplify Your Trading Profits

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As we traders try to find any advantage to take home more profits, its important to realize that every second matters when it comes to getting the price and entry you want.

One mistake that we all have made as beginner traders is to do the opposite of “Buy the Dip, sell the rip” or “Buy Low and Sell High”.

It all sounds very simple, however in real time it is not that simple. When you are trading real money your emotions will often want to take over your rationale.

What really happens is you see a stock you are interested in and you say “oh my goodness i love the way this is setting up.” Now its time to enter, but….

You hesitate. You want to see more confirmation.  Maybe just a little bit more. The price you were suppose to enter is now leaving you and each tick that is  going in the favor that you wanted is now making you do the following…

1.) Make you feel bad about not entering when you should have

2.) Makes you feel more confident in entering because it continues to move in your favor

3.) F.O.M.O (Fear of Missing Out). You now regret not entering + you feel that the stock will continue to go higher. you think “why would I sit out of this trade when its doing what I want it to do”

What then typically happens is the stock you now enter late into now reverses, whether it be a pullback or a straight dump. This now makes you nervous especially if you have big size on.

More often than not, you will be shaken out of the trade for a loss. Then to make matters worse, the stock you now exit out of now reverses to go back in your favor.

Typical, right.

These 3 reasons in my opinion are the main reasons why so many new traders end up buying at the top.

I have done it plenty of times as a new trader so don’t feel bad. We were all new at some point.

The main key that was explained to me was that …

We do this because it is human nature to want to see confirmation first before we take risk. So when we see the stock continue to climb without us, the more tempting it is for us to jump on late.

Perfect example: Bitcoin at $17,000-$20,0000.

Now, whats the solution?? Buying at the times when its uncomfortable.

Simple but difficult at the same time.Let me explain some more.

When you have a stock that you are interested in and you want to buy it,  the best time to my is usually during a pullback. That means when the stock makes its move upward in a volatile manner , you don’t buy into that move.

You buy the pullback because it is literally buying at a better price. That is the way you have to think.

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In this picture above, you will see where I recommend to buy and where not to. In the moment it will be hard to buy the dip for beginners , but think about it like this.

In the first area there is a difference of .37 cents from the the top at $2.00 from the bottom of the pullback to $1.63. If you bought the top with 5,000 shares and were waiting for it to come back above 2 dollars, that pull back would have made a draw down of -$1,850 dollars.

Ouch. -18.5% On your position. (5,000 Shares X $2.00 = $10,000….($1850/$10,000) X 100 = 18.5%

Compare that now, if you Bought at $1.70 for 5,000 shares. The most you would have been down would have been $350 dollars.

Also, if the stock still went lower, maybe $1.50 lets say.

You still would lose less money than the person who bought at the top, since you average price is lower.

Buying dips or pullbacks will literally make you more money if the stock goes in your favor, and still save you more money if the stock goes against you.

It just takes time to get use to it, but overtime it was one of the most beneficial things you can do to enhance your trading.

 

5 Ways To Tell You Are Using Too Much Size When Trading

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Either you just started trading or you have been at it for awhile and you are feeling confident. You have been consistent and you feel like its time to increase your total size count. Going from 100-300 shares to 1,000 -2,000 shares or something along those lines, right?

Because why not? If you can make $200 consistently then why can’t you start making $2,000 right away?

What are we waiting for?

This has come across my mind before, and probably any other trader who has had some success with smaller size and wanted to start making big money.

Unfortunately there are flaws with this type of thinking.  So much goes into increasing size, especially if its by a drastic measure.

Here are 5 ways you can see that you are using too much size

  1. If You Are Uncomfortable Hitting the BUY/SELL Button.                                       

This was a big tell for me in my trading. Its not just about being nervous about hitting the button, it was when i saw the perfect entry that i wanted, or perfect set up, and hesitated because I was afraid of putting on all that size.

But when I used 100-200 shares, there was no hesitation at all. This really because I new that i could actually tolerate the loss from a 100-200 share loss, if I were to lose. This leads directly to point number #2.

If You Cant Allow Your Stop Loss to Hit/ Adjusting Stop Loss.                             

This can be another indicator that you have on too much size. Having your stop loss hit is part of trading. No matter what, you are going to take losses over time.

If you enter trades with a predetermined risk set  and move the stop loss lower to avoid taking the loss, it often means you can’t stomach the loss because of the size you are using. Leading to point number #3.

If you are not Truly Accepting The Risk You Set.

Don’t lie to yourself and say that “you accept the risk” if you are constantly moving your loss and holding losses farther than anticipated. The reason us as traders set risk is so that we keep our losses small as well as keeps us protected.

Anytime you set your risk for a trade, YOU NEED TO TRULY BE ABLE TO RISK IT.

Which means, if you truly can’t stomach a $200 loss, you need to be using less size so that you have more room to less the stock play out. Using less size will also take a less emotional toll on you when you lose.

When you lose $20 on a trade, can you sleep at night? Most likely. Because you can live with a $20 loss and go into the next trade unfazed. That’s TRULY accepting risk.

If the amount you risk is NOT proportionate to your account size.                 

These are related to the other points , but not he same. If you see a quality trade, quality setup, perfect entry. It can be tempting to “go all in”.

However, even some of the best trading setup ups fail. No strategy is 100% guaranteed.  So what happens when your $10,000 account is now down $3,000 because you went all in.

And when it was time to get out, you only then realize how much of a loss to your account 30% is. So most people hold longer, and longer , and longer. -40%, -60% etc. All that work gone just like that.

If the loss if not proportionate to your account, think twice before sizing up so much.

You want to take the trade off as soon as the trade starts going in your favor.

This one is my favorite believe it or not :). Its my favorite because it shows me how backwards we think in the moment of having big relative size in a trade.

We hold and hold the loss lower and lower because we are afraid to realize the loss, but when we have a lot of size on and the trade works out on our favor, our emotions cause us to exit early.

The complete opposite of what we were suppose to be doing; Keeping losses small, Letting winners run.

We do this because as soon as we put on a trade that we feel is a lot of size, we are already fearful. So as soon as its starts to work out we think “thank God, let me get out before this turns against me”.

Again, ask yourself, “Would I be doing this i had 200 shares in the trade instead of 2,000 shares??” Answer, Most likely not.

4 Important Reasons for Trading Through Different Market Conditions

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We often hear people ask traders, ” Are you a bullish or bearish trader?”. Almost everyone has a specific favorite between the two choices.

Some of us prefer the Bullish side (Long/Buy) because we like the idea of simply buying shares when we are ready to make the decision instead of worrying about “Is there any shares to short left?”.

Some of us prefer the Bearish(Short/Sell) side because we love the total collapse of a stock once it starts to fail. What ever the choice is, it is still a good idea to at least understand whats going on, on the other side.

What many traders don’t realize is that us as traders often will mistake our “preference” for the Short or Long side, with trading in a Bullish or Bearish market.

You start trading one day and after a while you convince your self that you enjoy buying much more than selling when in reality, the market conditions at the time are just better suitable for Long biased traders because the bullish market will give you more opportunities to buy and be correct.

It is important to understand your reasoning for choosing your biased, as well as trying to be a more well rounded trader.

Here are 4 Reasons why I believe it is crucial for all traders to trade through different market conditions.

1) You Truly Don’t Know How To Trade Until You have Experienced Different Market Conditions.                                                                                                                   

 I believe this wholeheartedly. Its very easy to pursued yourself into believe you are a top trader because you can make great profits in a market that is trending in your favor.

However, what is the common trend that happens to the type of trader who thinks like this? When the market turns against them, they don’t keep their money. They more times than not end up blowing a big portion of it.

Why? Because they think they can trade the same way through any market trend.  The truth is the best traders know when to step on the brakes, and when to turn on the gas.

This leads to point number #2.

2) You Will Understand The Right Time To Be More Aggressive, and The Right Time To Be Conservative With Trading.

This is one trait of great traders that many people seem to overlook. This is how the great traders you look up to are able to profit a lot for a certain time, and then suffer much smaller losses over time.

They realize that you can be 100% aggressive at all times, because the market changes. Its no different than Steph Curry or most great basketball player. They can often tell within minutes of playing that today is going to be “one of those days”.

A day where he can shoot more than usual, or attempt more outlandish shots because the first 5 shots he took were all perfect. So they may average 25 points per game but in this game they think ” I am going to go for 60 points” because they know this day, “my shooting looks better than average/ my shooting is far into my favor”.

This is no different than the stock market being in your favor. If you are a long biased trader and the markets are bullish, plus you are seeing stocks do ridiculous moves, 50%, 100%, 200% gains, this should be the moment you say, ” its time to be more aggressive” and size in a bit more than usual.

When the market is not in your favor, and only 1 or 2 stocks are barely making 25% moves, then this should be an indication to use less size than usual, because the likelihood of you losing on bullish opportunistic is higher.

3) In Can Make You A More Profitable Trader/ More Well Rounded Trader             

Well this should be obvious to most, but in case its not , its alright. Explanation incoming. If you can learn to make money in both a Bullish market , but ALSO a bearish market, it will instantly make you a more profitable trader, instead of being the trader that is only great in a Bull market but absent in a Bear market.

Another basketball analogy coming. The top NBA players are usually never one sided players. They’re almost never strictly offense or strictly defense.

Obviously there is your occasional one, but for the most part the top players are great at either offense or defense, but still really good at defense. Michael Jordan, Kobe Bryant, Lebron James, Shaquille O’neal, Wilt Chamberlain etc.

On top of that, because you they are not only top players, and that can play both sides (Offense and Defense) they are usually the players that get paid the most dollars (Lebron making close $80 Million in 2018).

Why?? Being well rounded means that you are present in the market, the  same way a multi-purpose player gets more playing minutes. More presence in the market means more opportunity the same way more playing time often means more points and other stats.

4) People Will Look To You For Advice More Often Then Your Competition. 

This is mostly for the traders who plan to open of services , blogs, YouTube channels, etc.

The more you know about different market conditions and the more you can prove that within any market you can not only survive, but make great money on either end, the more people will want to buy your product, ask for your advice, or recommend you to other beginners.

I use to watch a particular trader on YouTube religiously. Until I realized that when the market turned he was basically absent, which is fine, but it made me go search for someone else who was proving they could make money in a time when the YouTube trader couldn’t.

Your business side of trading will do much better if you can show customers that you are capable of showing them both sides of the game. Bullish and Bearish. Offense and Defense.

The #1 Trading Skill That Professional Stock and Options Traders Possess

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Buying breakouts, shorting pops, holding through uptrend, hammering the washout short. So many different skill sets that so many of our favorite traders attain.

Some of us believe that being able to hold for an extended period of time is a top trait in a trader. Well this as top skill that a lot of professional have, however it is not the #1 trait I am talking about.

The ability to hold through a trade to maximize profit or to allow the trade to go in your favor is exceptionally difficult because we often get scared when the stocks start going against us, anxious when the stock starts moving in our favor, or just out right bored our position isn’t moving at all.

The ability to sit through this all in order for your plan to work requires grate discipline and patience. Not just for a week or month, but for your entire trading career.

The ability to sell short is also a great advantages strategy to have. Not just because of timing, but depending on the type of stocks you are shorting, the shares might be hard to borrow and hard to locate.

This means you cannot just short when you want to. You have to have the correct presence of mine to determine if the stock will be a good stock to short today or next week, and begin to pay for borrowing the shares.

Now bigger name stocks as well as higher price stocks usually don’t have that problem because they tend to have plenty of short shares to never run out of.

However if we are strictly talking about low float, low priced stocks, then being able to reserve short shares for the correct stock to short later in the morning or day is a commendable trait.

Out of both of those examples along with much more traits that make a successful trader the success that he/she is, I have my own belief that…..

Fearlessness is the ultimate trait the professional traders need to have in order to not only be successfull in the first place, but to continue to grow as traders and evolve into better traders over time.

This fearlessness in trading can be spread out into different areas of stock trading.

Lets talk about buying and selling. How many times have you looked at a a chart setup you liked and saw the opportunity to get involved, just to hesitate when the perfect opportunity arises. You now watch as the stock moves in your favor without you.

This hesitation is usually a form of fear. Why else would you not attack the opportunity to take part in a setup that you favor over others and is proven to work over time?

Same question. Why would you not shot  a wide open layup if the opportunity was given to you? Maybe because you don’t want to mess up? Maybe there is too much people watching? Maybe your are to anxious? Maybe your afraid?

A player or trader does not give up the opportunity of a great potential trade or shot unless there is a better one they anticipate coming.

If they don’t see a better opportunity, then they are in the best position to make it happen. They are the best opportunity, and they pull the trigger without hesitation because they know that.

Same goes on the defensive side when taking losses. How many times have you or a trader you know had a set stop loss but as soon as it came time to take the loss, you moved the stop loss lower?

I’ve done it before, we’ve all done it at some point. We do this because we are afraid of the loss, even though we said this was the set amount we were willing to risk.

The professional trader isn’t afraid of letting his stop loss target hit.

He does not change his mind when the trade stops going in his favor, he does not move his stop loss. He is not afraid for the simple that before he entered the trade he truly accepted the risk.

So when the stop loss comes close to hitting, he is unbothered by the loss. He can stomach it.

He will continue to trade as if he never took the loss, and he wont allow that loss to cloud his judgement going forward.

 

#1 Piece Of Advice That Will Automatically Change The Way You Trade Forever

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This is probably the best advice I have ever gotten about trading that complexly changed the way I think when I enter a trade. If you are not thinking like this for your trading, it will automatically make you a better trader when you hear it.

What is this #1 piece of advice??

Trading in terms of probabilities instead of trading on a trade by trade basis.

This is from a YouTube video from Mark Douglas and the video is called “How to think like a professional trader”. I could ramble on for a long post, but I will try and keep this one short and sweet.

Many beginner traders trade on a trade by trade by basis. This means that when ever they put a position on, they are worried about this one trade there in. If they win, they get joyous, if they lose, they feel down.

And both will effect the way they think about there next trade.

However, what Mark Douglas says in the video is that..

Traders need to think about their next 20 trades instead of their next trade. 

This all starts with having your EDGE.

Your EDGE is whatever method you have that consistently puts the odds in your favor. For example,

If you have a chart pattern that you paper trade 50 times and it shows that it has a 66% rate when you trade it, that is an edge. Because you have something that puts the odds in your favor (66%).

Now when you have that edge, you are now aware that over 50 trades, you know you will be profitable over time. However, you don’t know which trades out of the 50 will be winners and which ones will be losers.

Therefore, you would no longer need to focus so much on winning the trade in front of you, and that sense of relief will also allow you to put on trades easily and effortlessly because you know overtime it will work.

Another question Mark Douglas asks is “If you know it will work overtime, why would you be afraid to put on the position/trade?”

The reason we get afraid to put on a trade is simply because we are too worried about what is going to happen in this trade.

Obviously there is more to trading, but to simplify it,to be profitable you need do 4 things…..

1. Find your edge; Something will will put the odds in your favor over time

 

2. Allow your winners to run, cut your losses short (so that even if you win percentage is 50%, you will still be profitable)

3. Test your edge before you take it to actual markets

4. Trade your edge with real money remembering that its not about the trade you are in now, but about the next 20,30,50 trades you are going to take.

When you think like this you will not have to struggle with cutting losses as much because you don’t see a need to hold on to losers if you know overtime you will win.

 

 

 

2 Fatal Myths about Stock Trading

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When people start thinking about trading for extra income or for a living, their individual opinion of how long they have to trade for is often skewed.

On one end, you have the people who believe trading is this easy task that you can do almost everywhere comfortably beside the beach while sipping on your alcoholic drink. Not saying this can’t occasionally possible, but to trade like that the majority of the time is more unrealistic than you think.

The other side believes what they watch in stock trading movies. The pit like atmosphere, everybody yelling at each other across the room, taking phone calls for other people and putting there orders in.

Being in front of the screen for 8+ hours during the day is another thought that crosses their mind because they believe you must be present the entire time during market hours,

Neither of these beliefs are necessarily true. Lets start with myth number one. Continue reading 2 Fatal Myths about Stock Trading

What Is The Best Time Of Day To Trade Stocks?

A man looking shocked as he looks at the time  Good  Morning,

Like many tough decisions traders would have to make in their beginning stages of trading, choosing a time of day to trade can be a pretty difficult one.

What type of personality do you have?

Do you handle high stress situations well? Or are you more laid back?

Quick with your fingers? Do you naturally wake up early, or do you wake up later in the afternoon?

I am going to go through each option of time frames for trading and mention what type benefits each of them have.

Pre-Market: 4:00 Am – – 9:30 Am

Most people don’t consider this a real time frame to trade in particular because of the decreased activity. The stock market opens at 9:30 Am Eastern Standard Time so most of the volume comes in after that.

However, what I have noticed is that if you can catch breaking news early on, then you can kind of make trading pre-market your niche. The majority of people don’t do this, but i know enough to know its “a thing”.

This requires a broker that will allow you trade pre-market in the first place, as some brokers don’t allow trading until official market hours (9:30Am EST).

The broker I use allows to trade as early as 4 AM EST and as late 8 PM EST After Hours (Post-Market). This is extremely beneficial not only for trading pre-market, but in case you want to get out of a position late or early in the day for some reason.

There is also the benefit of getting in earlier than the rest of the crowd, especially on good news. How many times have you seen a stock have an insane gap up,but most up that gap up happened during pre-market?

The reason they have a gap up is because there are traders pre-market buying.

One of the benefits of trading pre-market is that, in my opinion, stocks have a bigger capability of running higher.

I have yet to see a trading halt in pre-market, so this makes it easier for those huge run ups to occur. Also because there is less volume overall in pre-market, if the consensus is that this is a buy, it causes the stock to skyrocket a lot quicker because there are not that much sellers yet.

Now I would never consider using big size during pre-market because the price can fluctuate a little too much.

9:30 AM –11:00 / 11:30 AM Regular Hours

This is the time frame that most traders choose to be active strictly due to the amount of volatility that occurs.

This time frame is the most active during the whole day. More specifically the first 15 minutes after 9:30 Am. After 11:00 Am/11:30 Am there tends me be less volume because traders start trading less, taking off positions, waiting through positions, or going out for lunch.

Trading during this time means that the biggest moves usually happen during this window, so traders are desperate to take advantage.

Another added benefit is that the increase volatility makes it easier for traders with bigger size to enter and exit positions smoothly.

Like I said in the pre-market section, you can’t really use huge size during pre-market (most of the time).

2:30 PM – 4:00 PM “Power Hour”

This basically heading towards market close, and traders start to log back onto there computers and see what they can get before for a quick scalp or for an overnight position.

Also, the added anticipation of knowing that so many other traders are becoming eager to find another scalp gives an extra urgency to this time frame and cause some pretty decent percent gainers to occur as it gets closer to market close.

This time frame one that I would more recommend for swing traders, as its the best time to see which stocks are finishing strong, which ones are finishing weak, and how that may affect the open the next trading day.

No Time Of Day At All??

I also want tot remind traders that you may not have to choose any specific time frame and stock with it depending on what type of trader you are.

For example, if you are a swing trader, you could be entering positions during power hour, and exiting them during pre-market.

Or even entering during regular hours, and adding more towards power hour. It really depends on what type of trader you are.

However if you primarily a day trader, it is beneficial that you pick a primary time frame that you are most comfortable with. God Bless.

 

Stop Trying to Predict Stocks

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“What if i bought Amazon and held when it was a dollar? I would be a billionaire.”

We are all millionaires and billionaires in hindsight. It all sounds so simple when we look back at it. But in reality, in the moment, it almost never works out that way we make it sound.

How much of us look back at a daily chart and see a stock we missed out and say,

“Aww man, if I put X amount of shares at dead bottom, and sold right at the top, I would have killed it”

This type of thinking is not necessarily bad. It helps you see the possible potential in some of stocks we play. But there is a downside to thinking like this as well..

TRYING TO PREDICT STOCKS

When we constantly see plays we missed it can create F.O.M.O (Fear OF Missing Out)

Since all these perfect scenarios are playing through our minds, it far too often leads to us pulling the trigger too fast on the next “opportunity”

We think, “Ok , this is gonna be the big one”, and before you know it..

The stock is tanking on you, you sized in too big, no news, no volume..

Anything can happen when you are too eager to find the next stock. I always preach the importance of getting early. However, that’s after you do your research and the stock meets your criteria of type of stocks you trade.

SOLUTION? FOCUS ON REACTING RATHER THAN PREDICTING.

This is what most of the best traders do. When you react instead of predict,

You are allowing for confirmation to take place and then quickly hopping on for the easy ride, instead of trying to anticipate it and letting that “ride” take you somewhere you don’t want to go.

You don’t want to be the trader that sees positive news and starts buying instantly. To some people they ask why would you not do that? Its positive news. Its because..

Not all good news influences the stock to go up, and not all bad news influences the stock to go down.

The news that comes out could sound soo sweet to the point where you think “There is no way this doesn’t go up.” But what controls the stock price at the end of the day?

News…? or Buyers and Sellers?

News and catalysts mean nothing unless the traders trading it view the news and worth buying or selling more. Once you as a trader understand that concept,

It will be very hard to continue attempting to predict stocks.

But will be easier to lock in profits after reacting. Good luck.

 

 

 

 

Risk Vs Reward Misconception

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Risk Vs Reward is a concept that many beginner traders think they understand, but in turn do not truly understand. Even professional traders often forget the underlying meaning of risk vs reward. When we bring up risk vs reward, we often only think of a 2:1, 3:1 or 7:1 scenario, or in a currency based example, risking $100(risk) to make $300 profit(reward) would be an example of a 3:1 Risk/Reward ratio.

There are a couple problems when discussing Risk/Reward with beginner traders as well as others, even in business or real estate. Number 1 Problem is..

Trading stocks that are not even worth trading just because you have a good Risk/Reward Ratio. I see this far too often. A beginner will often say something like “I took that trade because of the risk/reward. IT WAS A 6:1 Ratio!! ” The problem is not the ratio, in fact that ratio is beautiful. The problem is when traders decide to buy or sell a stock based on the risk/reward as the primary factor. There are a multitude of points traders should be looking at before getting into the trade that should be treated like a checklist. For example,

*Volume

*Catylist

*Chart Pattern

*Fundamentals

*Time of Day

There are more points to look at, but the point is that just because there is a good risk/reward ratio doesn’t mean that the stock is going to have a good chance of reaching that reward area. The focus should be on choosing a trade that shows the best probability of going in your favor, THEN you apply risk/reward.

Which would you rather?

#1) A stock that has a 2:1 Risk/Reward but has great news out and good amount of volume coming in

Or

#2) A stock that has 7:1 Risk reward but has no catalyst and trades 100K volume which a huge spread

Obviously this example is exaggerated but lets hope you picked #1. Picking stocks with more likely hood of going in your direction will always help your trading career flourish more than picking and trading stocks strictly off risk vs reward.

The Number 2 Problem with beginners and Risk/Reward is

Truly being able to to RISK the money you say you are willing to lose. When we say “only put in money your willing to lose”, traders and others alike often agree to do so without really understanding the extend of what that phrase means. If you have a $1000 small trading account, and you’re risking $100 dollars to make 2x, 3x or 4x, it doesn’t matter what it is. What often happens is when you take that $100 dollar loss, it is a big loss relative to the account. As a result of this it often will make you hesitate or over think you’re next trade simply because fear of losing another 10% of your account. I’ve definitely been there before. So in this case you should lower the amount your willing to lose, which in turn will lower the amount you are willing to make.I know , I know, we all want those $300+,$500+,$1000+ winners, but you have to think first about how to preserve your account until you are in a position to take bigger hits. If you take 1 $400 dollar loss on a $2000 dollar account because you were trying to hit the lotto on that one trade, I can almost promise you wont feel like trading the rest of the day. Even if you do, the mindset of someone losing 25% in there account in one trade often calls for revenge trading afterwards. Bad idea. Bad,bad idea.