Scott Barrie of Grainguide.com
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Perry G.

Kevin Warner of Strategic Traders (www.STFUTURES.com) 1-888-842-2263
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Today's Trading Tips

Let’s talk about Method 3 briefly:

This is the one that says you should try to find trading opportunities that offer a 1:3 Risk to Reward Ratio. That means that the potential loss (as established by the value between your stop loss price and your entry price) should be 1/3 the size of the potential profit (as established by the value between your entry price and your exit price). Why is that important?

First, a significant number of your actual trades will not be profitable. Likely that will be 30 to 50 percent of the time over the long haul. Let’s take the worst case, 50%. To oversimplify, if you loose $1 on half your trades and make more than $1 on the other half, you will be successful. Why didn’t I say “make $3 on the other half”? Because there will be some percentage of the time when your winners do not reach your exit target. And, there will be a small percentage of the time when your stop loss was breached, giving you more than a $1 loss. Gaps and slippage are facts of life in this business. While they can help us from time to time, it seems like they hurt us much more frequently.

Second, evaluating potential trades by comparing the apparent Risk to Reward ratios helps you to decide which trades to make. If you have three potential trades, one with a 1:3 R:R, one with a 1:4 R:R, and one with a 1:5 R:R, you may want to make your largest investment in the 1:5 opportunity. Some people do it that way, others recognize the randomness of occurrences and they make equal investments regardless of the R:Rs. Your call. 

Yes, there are traders who like 1:2 opportunities. There are others who won’t settle for less than 1:4 opportunities. We happen to like the middle-ground.   

Let’s also talk for a moment about using Rich Martins Market Support & Resistance Finder software. Here too, there are different strokes for different folks. I usually set the limiters (lowest price, highest price, starting date and number of hits) to give me 4 to 7 pages of data.

In addition, when there is enough data within the price range I am interested in, I will use the last 3-4 months of data- nothing older. Remember, it is both the density (number of hits) and the age of the price barriers that we are interested in.

Yeah, I find that I have to reset the limiters from time to time- especially when there have been a series of limit moves in one direction lately. Whenever possible, I like to have the software print out all the hits. When there is too much data, that is impractical (and a major waste of paper). If the current price is above my 61.8% LORs on both the Daily and Weekly charts, I often set the lower limit to correspond to my 38.2% value. If it is below the 38.2% LOR on both charts, I do the opposite (again, just to save paper). 

I usually run the reports on Saturdays so that Fridays data has all been downloaded. During the following week, I add in the new data by putting pen to paper. I even use codes to help me tell when the hits occurred (M, T, W, Th, F). I no longer pay attention to whether the hits were highs or lows. That practice is optional. Some traders swear that highs stop up moves and lows stop down moves. I just happen to think that it is easier to swear than it is to prove.