Increasing risk to reward for any trader should be a number one priority. By increasing your risk to reward, you are ensuring that your losing trades do not wipe out your winners. To calculate your risk to reward on any trade, you simply divide the reward on exit by the risk you had on entry to give you the risk to reward on that trade.
Increasing Risk to Reward on ES Trade This Morning
Yesterday I noticed that the ES forty-five minute chart had formed a congestion area. Price went up to the Congestion Dot and then was retracing back to the Average True Range stop. I posted the trade that made about five points on the retracement to the ATR. Price was trying to find an area that would support another price movement up and the ATR stop is typically where price finds this support. When price reached the ATR stop on the forty-five minute chart, it was hesitating unable to break the average true range stop. This is a great indication that price has found support.
Knowing that price had found support, traders can now zero down to a three minute for a potential long entry into the upward movement that is anticipated. One of the trades generated was just prior to the German opening. Price retraced back to the ATR stop on the 3 minute chart and an entry was generated at 1891.50. The risk on the trade, on entry, was 10 ticks or 2 1/2 points. Although the trader could have taken profits at 20 ticks (twice the risk), he could also increase the risk to reward by simply following price up. Notice how the ATR begins to move up and so does the red line (initial stop). The yellow line (aggressive stop) then begins to move up with price and finally overcomes the red stop line. The trade is stopped out at 1901.75 for a net gain of 10 1/4 points or 41 ticks.
Using the formula from above, the risk to reward ratio on this trade was 1:4.1 or for every $1 of risk the trader made $4.10. These trades do not occur everyday but by sticking with a trade that is moving in your direction, you can increase your overall risk to reward so when you do have losing trades, they are not as painful and do not wipe out your winning trades.