Improve Entry Point and Risk/Reward Ratio

Risk reward - day trading 101 - early entry

Improving your entry point and thinking about your risk/reward ratio

When trading, one must be vigilant and precise with their entry point. There might be a trade opportunity in front of you, but that does not mean you should make the trade right away. Sometimes you must be patient when waiting to take a position in a market.

Sometimes the entry point is as good as its going to get in the foreseeable future, but the risk-reward ratio just isn’t good enough. You seem to be putting down too much, for a return that is just too little.

In the markets, there are always going to be opportunities to make money. You will always have the chance to make money whether it be shorting or longing a position.The key is to be patient.

The Sniper Method

Think of yourself as a sniper. You should be calm and patient, waiting for the right opportunity to strike precisely and swiftly. The goal is to get one perfect shot, as opposed to an automatic machine gun that lets many shots fly with no precision.

The two charts above show the difference in taking an early long entry position and taking a sniper long entry position. The trader who makes an early entry realizes less profits, and has to wait longer for that profit, than the trader who makes the sniper entry. When aiming for a sniper entry, patience is key.

Control Emotions

Often times you will find yourself with a trade idea and wanting to jump into the market right away. You just can’t wait and believe that you have to get into this trade right away. Your emotions are kicking in and are really taking over your thought process leading to impulsion. You can not let this happen. You must calculate your risk-reward ratio and follow your trading plan.

Risk vs reward – A very important metric

The risk/reward theory should look like this –  anything above a ratio of one should be good in theory, but you should strive for higher. Take your reward, and divide it by your risk. If you are risking $5 to make $10, that’s a 2:1 ratio, which is good. Now vice versa, if you are risking $7 to make $3, that’s a ratio of 1:2.3, which isn’t worth trading.

In order to minimize risk, one also has to master the stop loss. A stop loss is a feature that is implemented at a certain price point that closes your position in order to cut your losses. You can read more about stop losses here.

Entry point and risk/reward management are both important aspects to trading that any trader should become familiar with. Mastering these two processes will allow one to maximize their own growth and revenue in the trading world.