How I measure risk and reward

If I am buying a stock for a swing trade I have a few rules:

1) Before I send the order to ‘Buy Buy Buy’ I complete a risk reward analysis. I will only enter a trade if there is a profitability ratio of 2:1(or greater) based on my analysis. By doing this I can be right only half the time and still make money.

Example: Ignoring trading fees for a second! If I buy 100 stocks of Royal Bank at $50 ($5,000 total capital committed) with a target of $55 (Profit target of $500, 100 shares x $5) and a stop of $47.50 (Stop loss at -$250, 100 shares x -$2.5). I am risking $250 to make $500!!!
                     
Although I am using $5,000 of capital my stop is $47.50 so I am only ‘risking’ $250. My target is $55 or $500 in profit. This is what I mean by a 2:1 profitability ratio.

Other things to do before you enter a trade:
-Always complete an analysis of support & resistance levels before you enter a trade

-Always enter a long trade at a support level (and a short trade at a resistance level

-Always have a target price and a stop price (the stop price, aka where you get out if your wrong is most important)

My analysis is based on support/resistance, market trends and chart patterns. I will explore these areas in more detail later.

Trade to trade well, not to make money!

- Steve -