Risk v Reward

Risk vs Reward Trading

The key to outperforming the markets is making sure time and time again you are taking favourable risk reward setups. By this I mean, entering a trade where you believe the stock will trend enough to outperform the risk you have on the trade. For example, a stock comes up in your chart scan and looks like it has a reasonable chance of trending in the coming days. You need to plan the risk (Entry to Stop Loss) against where you think the stock will move too (Reward). I will only take trades where I believe the reward outweighs the risk taken. I’m not looking to make a 1% return from a 1% risk. I’m looking to make a 5% return from 1% risk if possible.

Now, everyone has a different view of the market and will trade different setups accordingly. One of the traders I look too, Mark Minervini says he is right 50% of the time, whereas I’m only right about 30% of the time. His average risk to reward is 1 – 2. This means every 1% he risks, he will make 2%, 50% of the time. A phenomenal outcome. The way I trade is slightly different (and I am always trying to improve my statistics). For every 1% risk I take, I will a make 3.24%, 30% of the time. I would love to be right 50% of the time, but I like aiming for a higher risk reward ratio which often results in a lower win percentage. The lower the risk to reward percentage often results in a higher win percentage. However, you must ensure you keep achieving a strong win percentage otherwise you risk having poor performance. I will delve into performance statistics at a later date. Let’s now return our focus to risk reward trading.

To find a favourable risk to reward setup, I perform a scan on my charting software. I scroll through the weekly charts and pick out the best stocks that are trading above their 13 week moving average or just slightly below and add them to my watch list. Once I’ve finished my scans, I will review all the trades and look for consolidation patterns that may offer a chance for a continued trend. Once I have established the best looking setups, I will zoom down to the daily chart to define the trend, and then from then on, I will monitor the stock on the daily and hourly time frame and look for an area that will provide me with a strong risk to reward ratio.  Here are a few examples of what I am looking for:

Small pop above 13 week MA & then consolidation

Waiting for stock to form a defined setup

Opportune entry for defined risk

Pops above 13 Week MA and consolidates

Forms defined setup

Refined entry for favourable risk reward opportunity

Stock trading above 13 Week MA - strong trend

Refining the setup

Fine tuning entry for favourable risk reward

Of course finding risk reward trade setups in real time is a lot more difficult than looking at trades in hindsight due to your emotions and current performance levels. However, this is the basic premise for how I try to outperform the markets. What I haven't mentioned is how the markets trade through 'windows of opportunity' whereby trending stocks are more plentiful. You need to recognise when the windows are open and when they aren't. This is something I'm still continuing to improve on and a topic I will discuss in due course.

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Market update 22nd March 2020

Market update 22nd March 2020

Wow, what can I say.....I have never seen anything like this in the financial markets since I began trading in 2011 and its the first time in a long time where I haven't placed a stock trade in 3 weeks. Only a month ago, I was cashing out of profitable positions in anticipation of a correction. February was a big month and I locked in some great gains which has me well ahead for the year (financial year in Australia runs from July 1 to June 30). 

There's two things that I have taken out of the recent turn of events. The first being the ability to sell into the big blow off moves higher in the stocks I was trading. I scaled out of my trades as they moved higher, and made some great gains. More importantly, I achieved large risk to reward trades of 5-1 and greater. By that i mean, if I set a 7% stop loss, I made 5x7% = 35% gain. For me, these trades ensure my equity curve continues to move in the right direction.

The second item encompasses where I could improve. The first of these was the remaining small partial positions that I held into the first 3 days of the correction. Had I cashed out of these positions  earlier, I would be sitting on 50% gains for the financial year, however, holding on to these has meant that I am only sitting on gains of 39.5% for the financial year. This is something I will continue to assess in the future. Whether the downside risk, outweighs the upside risk.

The other item i'd like to point out is that despite exiting my holdings in advance of the recent large correction, i never though about scanning for short positions. Because i am a predominantly LONG ONLY trader, I noticed there were very few constructive setups and this gave me a hint that we were coming to the end of the February rally. However, I never actively looked for any short positions of which in hindsight, there was an abundance of setups that mirror my long setup in reverse. Had I connected the dots, I could have flipped the switch and taken some short positions.

The important take for me out of this is that I have summarised what has occurred, what I have done right, and what I need to continue to work on as a trader to enhance my performance and skills. You should be doing the same. Trading is an art that requires practice and analysing to achieve stronger performance.

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Personality in Trading

Personality In Trading

Personality in trading is very underrated, and if not taken seriously, it can lead to poor performance. Vice versa, if it's harnessed correctly, it can lead to much more consistent results.

What do I mean by personality?

Personality in trading means what style of trading resonates with you and allows you to remain happy, and in a good frame of mind. It's similar to when you're a kid and you try out a few different sports, instruments or friend groups. With some of these it clicks, you feel comfortable and want to persist, whereas with others it's not so comfortable and hard to follow through.

Finding this sweet spot in trading is no different. So, how do you determine your style? Well that varies from person to person, and i believe the best way to move forward is pick a style you think you are suited towards and begin with trial and error. It is through this process where you will discover what works for you and this may take time.

For three years, i traded a longer term style in which i was consistently profitable, however, i found it extremely difficult to stick to the plan when my plan told me to hold through very deep corrections. While this sometimes paid off with big winners, my mindset was completely worn down after giving back large open profits on multiple occasions. This process of self discovery made me realise that this type of longer term trading was not conducive to my personality, and I needed to reduce my holding period in order to take profits on a more regular basis. As i begun to implement these parameters into my trading, I found i was often in a more relaxed state of mind because i wouldn't hold through large corrections.

The most important part of my personality in trading is that i like to remain in control. Now I realise that I cannot control the outcome of a trade, but i can try and control the risk of the trade as much as possible. This will ensure I remain in a good frame of mind. What do I mean by this? Well if i enter a trade and risk $1,000 (entry price to stop loss point), I want to make sure I don't lose more than $1,000. The $1,000 loss is my control point. I know it will be annoying to lose an outright amount of $1,000, but i don't want to lose anymore than that if I can avoid it. Why is that? Because if I let the loss grow bigger than $1,000, I will begin to fall out of my comfortable personality zone where I feel in control. Once you enter that zone, your mind will begin to wonder to other areas where it shouldn't. Now, I cannot help if a stocks gaps down unexpectedly past the point of my $1,000 loss point, but that needs to be taken into account.

With each trade you take, you'll discover more about your personality in trading and this will tend to guide you in the right direction, namely how you control your risk, your risk tolerance, where you like to take profits and so forth. Everyone is different, and you need to adjust your trading to suit your personality in order to achieve consistency.

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Drawdowns and Emotional Capital

Drawdowns & Emotional Capital

By far one of the hardest aspects of trading is going through a losing period known as a draw down. Not only do you experience a loss of trading capital but it can also cause an exhaustion of emotional capital.

We can't control the markets and the outcomes of our trades, but we can try and reduce the impact of our emotions by adhering to a plan that suits our personality.

After trading for a few years, I realised I found it very difficult (and not to mention exhausting) to follow particular trend following strategies. This often led to draw downs that would leave me questioning the strategy and my thought process. It wasn't until one day where I really broke down the thought process and realised that I needed to trade in a way to protect my mindset by being confident in my strategy. This would allow me to keep a calm mindset when the inevitable pull back came.

Emotional Capital 

Understanding your strategy, statistics, and emotions will aid in protecting your emotional capital which will make the draw down phase less exhausting.

1) Its important to understand your strategy, your setups and what resonates with your personality. Conditions are constantly changing and your particularly strategy will eventually go out of sync with what's working in the market. For example, if your strategy thrives on high volatility and suddenly we enter a phase of trading with low volatility for an extended period of time, your strategy may begin to falter and you will most likely enter a draw down period. If you had no idea about how your strategy made money, you would really start to question yourself and once this occurs, you enter a dangerous proposition whereby it is easy to lose money. However, if you understood how your strategy delivers returns, you would become aware that you may be entering a market environment which is not conducive to your strategy and thereby begin to protect your emotional capital by being more selective or reducing risk.

Understanding your strategy allows you to determine why you are suffering a draw down and how to remain confident in your strategy.


 2) It's important to know your average statistics. If you have a win rate of 40% and over a period of trades this gets below 35%, your strategy is telling you that your style is out of sync with the market and can be a signal to scale back your activity. This doesn't mean you should stop trading altogether, it may just mean you need to be more selective during the current market environment.

Not only do your long term statistics give you an indication of what you can expect from the outcome per trade, but they also set you with a goal. Knowing your win/loss percentage and profit/loss per trade gives you a chance to outperform your current statistics. When you enter a trade you should be thinking, will this trade provide me with a good chance of outperforming my average gain or crystallising a loss smaller than my average loser.


3) Emotions are a massive part of trading and it is easy to get caught up in the roller coaster. If you ever find yourself checking your positions more than usual including looking up message boards, research sites, thinking about the monetary returns DURING the trade - you are on a slippery slope. The key is to remain in control of the trade and in turn, your emotional capital. Write out your plan before the trade (outside of market hours) and let the market do the rest. Stay in control of your trades at all costs. This will keep you in a positive frame of mind that will ensure you don't deviate away from your strategy.

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Big Picture Outlook

Attention traders struggling to achieve profitability, this one is for you.

One of the most crucial items that helped me become consistent was MINDSET. It's easy to get caught up in the entries & exits, what stocks people are talking about, what looks good, what setups you should be looking at, what the price action is saying.....and the list goes on.

Take a step back and really think about what is required for you to make money in a stock position.....

The simple answer is, if you are buying a stock, the stock needs to go up. The more it goes up, the more money you make. Rinse and Repeat.

Now keeping in mind we have established a big picture of what needs to occur in order for you to make money, let's breakdown how you can achieve this.



1. CREATE A TRADE PLAN. e.g. I will buy here, sell here if it goes against me or exit when price has hit my trailing stop.

2. Follow the plan.... Buy the stock when your criteria has been met. Set a stop loss at a point where you no longer want to be in the stock if it goes down. Trail the stop loss higher if the stock moves further in the anticipated direction. Exit when your stop loss price is triggered.

3. Record the trade outcome and move on to the next.

Trade plan to buy and sell stock

Trade doesn't work out according to plan and you exit the position

The key is to remain objective at all times. Don't worry about the outcome of a trade. You will have many trades over your trading career. Focus on sticking to the plan you created, the plan that was to exit losing trades quickly and let winning trades move higher.

Look at the trade outcomes after a series of trades (30-50 is probably a reasonable start) and that will give you an idea if what you are doing is working or needs to be tweaked.

The only way to really achieve some consistency is to keep it simple and focus on the big picture. Plan the trade, trade the plan and record your trades. If you buy a stock, it needs to go up for you to make money. Put yourself in a position to sell at a small loss if wrong and sell with a larger win if right.

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