As in our life situations, we traders have to make several “this one” or “that one” choices in our trading world as well.
This broker or that broker?
This trading method or that trading method?
This strategy or that strategy?
Swing trade or intraday trade?
15 min TF or 5 min TF?
Trend trade or counter trend trade?
The list goes on…
In this post I am going to expound upon this choice - Higher Reward to Risk ratio (RR) OR Higher odds of Entry? By the by, this topic was inspired by a question put up by a learner on Traderji forum who uses the handle vikki_trader, so thanks to Vikki for asking this question!
Sample this situation- ITC on a 30 min TF is in a nice down trend, that is, continually making SZs Drop-base-drops (DBD) and rally-base-drops (RBD) on the way down. So you have identified a nice SZ with a strong gap down for a short trade, so you want to mark the zone which has numerous basing like candles. You can also see that there was good gap up opening today which created an Opposing RBR DZ, so you decide that your Target should be slightly above this opposing DZ. But now there is a choice that you must make – Would you opt for “Higher Reward to Risk ratio (RR)” OR would you opt for “Higher odds of Entry”?
Let’s explore the choice of Higher Reward to Risk ratio (RR) first.
In this, you opt for the best RR given the Target you have. So you keep the Zone narrow. You mark the zone from where the gap down starts. This gives a handsome RR of 4.8 ! So if you position size the quantity for a risk of Rs.1000 then you stand to make Rs. 4800 in this trade. Awesome for an intraday trade! The flip side to this choice is that you may miss entry to this trade if price reverses much before your entry line. In that case, the trade is gone & you miss the opportunity.
Let’s explore the choice of Higher odds of Entry.
In this, you opt for the higher odds of getting an entry given the Target you have. So you keep the Zone wider by keeping the Entry earlier. You mark the zone as shown in the chart below. This gives an ok RR of 1.5 ! So if you position size the quantity for a risk of Rs.1000 then you stand to make Rs. 1500 in this trade, which might seem a bit low but you have better odds of getting an entry/fill for your trade.
There is also a third way of marking the zone which does a balancing act on the choices that we have! This yields a better RR of 2.5 but odds of getting entry is slightly higher than the first choice but lower than the second choice.
