Advanced Techniques in Day Trading – 1st Edition [PDF]

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Advanced Techniques in Day Trading – Book

A good entry defines an excellent risk/reward. You may recognize a trading opportunity correctly, but if you cannot find a good entry with a proper risk/reward ratio, you should not take that trade. Instead, you should keep monitoring your chart until you find a good risk/reward ratio.

To illustrate this point, let’s review Figure 7.11, where I explain two potential trades on SQ. You recognize an Opening Range Breakout toward 200 SMA on your 5-minute chart, and you would like to go long, but you notice it at 9:45 a.m. when the price is almost at $41.75.

That is a profit of 75 cents toward 200 SMA at $42.50. But, to enter that trade, you have to define a risk below VWAP at $41, a risk of 75 cents per share. This is a 1:1 risk/reward, an undesirable risk/reward ratio, so you should not take the trade at that time.

Ten minutes later, at 9:55 a.m., SQ’s price has dropped to $41.50, and now you are thinking of going long toward 200 SMA. Now the risk/reward ratio is in your favor: your stop loss can be at VWAP, around $41.25 (please note that VWAP has moved up from the $41 of 10 minutes ago), with a profit target still at $42.50. This is now a 1:4 risk/reward ratio. It’s the same idea, but a different entry provides a different risk/reward opportunity, and that makes a huge difference in your trading result.