In my book The Stock Trader, I narrated a detailed day-by-day account of how I trade the market: the trading strategies and money management techniques that I use. Below is an excerpt of my book on the topic of how to evaluate risk-reward ratio. I later wrote a 2nd book How To Take Money From Wall Street  to expand on the trading concepts. 

A trader should never risk more than he can make on a trade. I try not to risk more than 1/3 of what I am looking to make on a trade. In other words, my reward is normally three times greater than the risk I will take. If I am looking to make three points on a trade, I can only risk one point, so if I enter a stock at 50, and my price target is 53, I will have to cut the trade if the stock falls below 49. If the setup I look at does not present me with this ratio or better, I will not enter it. This will be one of the rules I will try to follow religiously over the next four week.

Stop Loss

One of the keys to successful trading is an effective stop loss system. In the next four weeks, I utilize the following strategies to limit my downside risk. I will first take into account the risk/ reward ratio presented by the setup I am going to trade. Next, I will take into account the maximum allowable drawdown on my position. Then I will define where technical support is found.

I will use one of the following strategies for the placement of a stop loss:

* Below today's low
* Below yesterday's low
* Below secondary intraday support levels
* Below multi-day intraday support levels
* Below 50% retracement of last rally
* Below an index day's low or intraday support levels

Once I am in a trade in which the initial stop loss was never activated, I will use trailing stops to protect profit. I will be monitoring the overall market, the individual stock, and the Market Makes to determine such exit points.

The above 2-day intraday chart shows the different strategies for the placements of stop loss and trailing stop orders that I will be using over the next four weeks.

The final candidates for potential trades on Monday, March 20, 2000

TCLN has come down in price from 16 5/8 to 7 ½. I was going to watch the stock to see if it could bounce back up in price if it reached the following support levels:

$6.00 - This was the low the stock hit on 2/24/00, and was able to trade up from there.

$5.72 - This is the price level where the 50-day closing price moving average lies.

$5.50 - This is the price level set by the stock on 1/24/00 on the high of the day. This is the same high that was taken out on the breakout on 2/17/00.

If TCLN goes down on these price levels and is able to trade back up, my price targets will be between 10 - 12 a share. The 10 level was the high set on 2/22/00, and the 12 level was the high set on 3/14/00.

The next thing was to determine the stop loss. I left that field open, and I made a little not to myself saying that depending on where I enter the stock, set a stop loss at 3/16 below the low of that trading day.

IFMX has made a 52-week high at 21 and pulled back to 17 ¼. My trading plan for this stock is to buy it at 16 ½, which was the high the stock made on 2/7/00. My stop loss is at 15 7/8, and my price target is 19 - 23. My plan is to buy 300 shares at 16 ½. I will add 300 shares at 16 7/8 should the stock show strength. I will sell 300 shares at 18 7/8, and trail a stop behind the remaining 300 shares, I will give it a chance to move to new high ground.

RRRR has pulled back from 94 ¾ to 60 ½. The last trading day, the stock closed below the previous day's close, but it did not trade at a lower price than the previous day's low. My plan is to buy the stock if it trades higher than 63. My stop loss is to be placed at 60 3/8. My price target is 75 which was the low the stock made on 3/13/00.

RSLC has pulled back from a 52-week high at 32 ½ and was at support levels around 24. The stock did trade lower the previous day and hit 23 3/8. The close yesterday was the lowest closing price in nine trading days. The 50-day moving average is at 21 ½ and I will be looking for a possible bounce at that price level. My trace target will be 24, and my stop loss will be placed 1/8 of appoint below the low of the day.

HIFN pulled back from a high of 116 to 76. It closed near the high of the day at 78 1/16. My plan is to buy HIFN if it trades higher than 78 3/8. My stop loss is at 75 7/8, which is 1/8 below the low of the day. My target is 89, which was high was the high on 3/10/00.

DIIG is trading in rising channel. It held the trendline and is now looking to turn up. My plan is to buy the stock should it trade higher than 103 ¾, my stop loss will be 99 ¾. My price target is 115 - 125. I found this potential trade on my Constant watch list, which I analyse everyday.

The above is an excerpt of how I go on choosing my final trading candidates. In the rest of my book, The Stock Trader, I proceeded to detail how these trades pan out and how I adjust my trades according to emerging market conditions, from Day 1 to Day 20. For those of you who are eager to learn how to trade more successfully, my book may help you learn the important rules and avoid the mistakes that I have learnt in my trading career. In the four weeks of the challenge, I made a total profit of $16,277.25. This was a 32.55% return in one month on the $50,000 I opened the account with. Once I closed my positions, I devoted all my time to the writing of The Stock Trader. How To Take Money From Wall Street is a later book that I wrote to expand on my first book. 

I will leave you with 3 important rules:

1. In choppy markets, take quick profits.

2. In trending markets, squeeze your winners.

3. Be diversified if you are taking overnight positions.

Article written by Tony Oz, professional short-term trader and author of top-selling The Stock Trader: How I Make A Lixing Trading Stocks and How To Take Money From Wall Street

How To Take Money From Wall Street ISBN: 0967943515

How To Take Money From Wall Street How to Take Money From Wall Street is a top-seller that explores the mindset of one of USA's top traders. In this book, you will learn how to: - Master the mindset of a professional trader - Profit from Tony Oz's award-wining Money Management System - Effectively use MTF Charting Techniques in your trading - Write and execute a Trading Plan successfully - Take advantage of Tony Oz's Stock Market Calculator to forecast stock prices - Utilise real-time scanning strategies to find high-probability trades - Time your entry and exit to capture higer rewards while maintaining lower risk - Differentiate between Classic Swing Trading Strategies and Oz's Low Risk Strategies [Click here to read more]