Three rules for entering a trade
Entering the trade
Entering a trade without ascertaining certain things is gambling. In this post, we will learn the pre-requisites to enter a trade.
DON'T ENTER A TRADE WITHOUT DETERMINING THE FOLLOWING.
We understand what reward to risk (popularly called risk to reward) is. It will be denoted by R:R. We will also try to bust a few myths about R:R and how to avoid losing trades. Before entering a trade, you need to determine 3 things.
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Entry trigger
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Stop loss
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Target
1. Entry trigger
2. Stop Loss
3. Target
Reward to Risk (R:R)
We will always ONLY use TA to determine all 3. A combination of the three coming together forms R:R. We will try to understand what really R:R in this post. R:R simply is the ratio of the distance between entry and target, and entry and the stop loss. Here is an example of the R:R ratio.
R:R is generally denoted in ratio form such as 2:1 or 3:1. If the target is 10% above the entry and the stop loss is 5% below the entry, the RR is 2:1
YOU SHOULD NOT BE ENTERING A TRADE UNLESS THE R:R IS KNOWN.
Myth. A fixed minimum R:R is necessary for taking a trade.
Even Murphy in his book has advocated for the same but in my opinion it is a wrong benchmark to have. Sticking to a fixed RR can prevent us from entering a high probability trade at times, eg at confluences.
This table describes how much R:R is needed for a certain level of win rate. Eg. If your win rate is 50%, you will be at breakeven at a R:R ratio of 1.
The above might seem confusing but the crux of the matter is,
- Test your strategy
- Find your win rate
- Use only the R:R setups which suits your win rate.
Eg. Always choose a trade with R:R greater than 2 if win rate is around 33%
Conclusion.
- Find your win rate. Choose trades with R:R which suits your win rate.
- Base the above only on TA.
- Never enter a trade without knowing the target and SL.
- Don't get stuck with a fixed R:R.
It is a must-use tool to avoid trades that don't suit our win rate. This gives a HUGE trading edge as most of the lower win probability trades can be avoided.
Source: @EmperorBTC Twitter
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