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real world stops and risk reward ratio.

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Grantx View Post
How you position risk depends on so many things. For example, if you look at the recent increase in volatility on equities, it is clear that you cant just have one approach because conditions have changed and you must adapt accordingly.

Firstly, you should try to find the 'sweet spot' on your chart and by that I mean, where are the measured swings? It takes a lot of time because you have to go through the timeframes to try and find the pulse (sorry its corny but I dont know how else to describe it). The market see saws and oscillates up or down and when you eventually find that rythm you will be able to trade these fluctuations with more confidence.

Also, the market usually has a theme that it is pricing in. For example, right now it is possible this trade war is a contributing factor wrt to the correction in equities. So let pretend the market was ranging, then if you got an extension to the downside you could be a bit more confident in your short trade that the breakout would stick because the action is in line with your expectations.

So how would you place a stop in this scenario? I would scale into the short as the market retraced and my stop would be somewhere above the top of the range. Reason? Because it is clearly selling off and I dont want to miss the short by having tight stops on a market with a selling theme. Also, when it retraces, its likely to find liquidity just inside the breakout but unlikely to make it to the top and breakout the other side (because the theme remember). You want to increase your stop size when taking shorts but if you are playing reversals against the trend, then take your chances but keep your risk tight. You dont want to be adding to losers especially when playing against the theme.

So you see its not a question that can be answered. You should have some kind of idea what the market is doing and then use price action to trade that theme as current conditions dictate.


@Grantx this is a fantastic response, thank you! You are hitting on a lot of stuff that I'm trying to absorb in my live trading. It is all very mechanical at this point, On any particular morning I'm forgetting a key here or there, but that is to be expected and I think I am slowly progressing. This does help, thanks again.

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