High Reward to Risk Trade Example(s)

csw2002

I have had a discussion with QWE in terms of whether high probability of getting the direction right is more important or high reward to risk trade is more important at here .

Well, coming back to the topic, I thought I'd contribute something to the ongoing discussion and come up with some set-ups that I have seen that have very high reward to risk ratio, but not necessarily high probability trade. I will endeavour to add to this thread going forward with additional set-ups. Please note that these are all swing trade examples, though applicable for day trading, but not ideal.

False Breakout on Mature Consolidation Range
(1) Depending on your timeframe, a mature consolidation range could mean different things. From a swing trader perspective, a trading range established over a couple of weeks where multiple touches to the bottom and the top have taken place would be considered mature.

(2) After a trading range becomes mature, the market will increasingly likely trade in one direction and break out. The longer a market stays in a trading range, the higher the probability of a breakout.

(3) If market breaks out at one end, breaches the established resistance/support, and then promptly reverses back into the established range, the false breakout trade may be taken.

(4) Under the false breakout scenario, market should trade in the opposite direction of the false breakout until it reaches the other end of range.

Given the above scenarios, if a mature trading range is sufficiently wide and you spot a false breakout, then you may be able to set up a high reward to risk trade. Taking the Oct 4th false breakdown as an example, as soon as the prices reverted back into the range (on high volume which indicates participation from the big money), you could go long targeting the top of the range with a close stop placed under the bottom of the trading range.

I have seen this false breakout scenario occurring in multiple timeframes, from hourly, daily, to weekly charts for different instruments (from stock, futures to commodities). For swing traders, daily chart is probably more suitable for the purpose of identifying mature trading range.

I forgot to add that if the trade is successful, it would take a fraction of the time for the price to move to the other side of range of the mature consolidation range. The range we had in S&P took 2 months to mature and less than 2 weeks to traverse from the false breakout back to the top of the range.

npnt

Very useful pattern indeed.

xiamao

cool

bucks

that's a very good point.

bucks

How do you determine the range of a matured consolidation zone? Lower high and higher low, or the other way? use Oct. 4th as the example, a break down was assumed only when 1101 was taken or 1114? when the market returns to the zone on Oct. 5, which level to serve the stop?

csw2002

回复 bucks 的帖子

Determining the actual top and bottom of the range is an art rather then an exact science. In any case, the support and resistance is not a single number. They are a range in itself (i.e., the whole process is fractal in nature). In the most recent cases, I considered 1100 +/- 5 as the bottom of the range and 1210 +/- 10 as the top of the range. When I went long on 4th of Oct, I waited for the price to come back above 1105 and I put the stop at 1095 and my target was 1205 (which was met).

shyshark

xz214

xiaochong

bucks

回复 csw2002 的帖子

thanks. It's very insightful

dodofish

NewMember

How well does it apply to individual stocks?

NewMember

And some other questions.  Do you consider SPX and Nasdaq still in the range?  QQQ seems to have well broken the range upward.  If there isn't a pullback to the range, will you chase the high?  What will prove the breakout is not false?

NewMember

Forgot to say, great post, very informative.

csw2002

回复 NewMember 的帖子

As I said in the original post already, this concept works on multiple timeframes and on all publically traded instruments including individual stocks.

silicon_beaver

mark. will come back to read carefully.

silicon_beaver

All right. just read the thread completely.
Thanks! great post. 授之以鱼不如授之以渔.

QWE

cat2011

西安

Always like your posts.