Define Your Risk/Reward
Duke Heberlein is
on vacation. Michael Brooks wrote this column.
We talked about descending triangles yesterday
and today offered us another good example. This is a pattern that comes across
the TradersWire frequently and can offer you a simple but effective trading
strategy. The following alert was posted this morning.
10:09:53
Intraday
Setup Alert
Siebel Systems (SEBL)
is forming an descending triangle on its intraday chart.
SEBL is on TM’s Change
In Direction list and is up 0.14 at 18.82.
Walking through this example, we have a height for our triangle at approximately
60 cents. We want to strive for a 3 to 1 risk/reward, so we need to
keep our stop at no more than 20 cents. As I mentioned
yesterday, if the normal
placement of your stop does not fit into this criterion, then you move on to the
next trade. In the case of SEBL, a 20 cent stop appears to be a reasonable exit
strategy on a break of the base. The base is broken and we exit at least
part of our position at the 60 cent profit level. Many traders may wish to scale
out along the way. There is no best way.
Don’t get bogged down with over-analysis. For example, trading is subjective,
some may see this pattern as more of a pennant formation or they may see this as
the piece of a larger pattern. The real key is to define your risk and reward
before a trade and have a plan to take some profits when you reach your reward
levels. Do this same thing over and over and you will become consistent,
regardless of the name you give to a particular chart pattern.
Have a good trading day!