Setting Risk based on Reward?

Discussion in 'Strategy Development' started by cipherscribe, Oct 29, 2006.

  1. I would hazard a guess that most people who determine their risk:reward ratios do so based on their fixed determination of the profit potential, and how they implement their stop losses.

    I'd like to know if anyone changes their stop loss when they place a trade, based entirely on the profit potential?

    Putting the cart before the horse, is it reasonable to look at a setup, and set your stop loss based on a 2.5 ratio or better? For example, say I have an opportunity to make 7% on a trade, based on my interpretation of where the stock might reach prior to reversal. My ATR stop would normally be defined as about 5% for this example.

    Would it be reasonable to reduce my Stop to 2.8% or below to maintain a reasonable ratio? Or should I miss the trade altogether?

    Or do I need to 'test' such a system to give me a valid determination?