Reward Must Be Proportionate To Risk

On very short-term trades, characterized as scalping, you can be successful with a 1:2 or even a 1:1 ratio. This means if your loss limit is a nickel, you can accept a reward of a dime or even a nickel per the species the underlying entity trades in, e.g., shares, bushels, barrels, bales, pounds, etc. With swing trades, you will be in the market longer (several days to a week or more) and should be looking for ratios of from 1:4 to 1:10. With the former, you are trading heavy and the latter light. Never violate this rule. Long-term investors can look for 100 percent, 200 percent, and more for holding positions for months, quarters, and years.

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