Q:  How can do you quantify odds of 10-1 in your favor before you make a trade? Is it your profit goal is 10x more than your stop loss? 10 indicators that look good and one that does not look good? Can you share with the group how you get to 10-1 odds? It may not be an easy answer, but I wonder if you could expand.

Think of it this way. After I’ve performed my analysis of all of the things I look at (fundamentals, technicals, sentiment) and list them out at the price I’m considering making a specific trade, they must without any measure of doubt be highly tilted in my favor. In other words, it must fit my definition of what I consider to be a low/risk high/reward setup. For every negative I can find that argues against a specific trade, I need more than just a few positives to offset it.

What results from this analysis is that the total number of trades I make is lower than most, but the percentage of average winning trade is higher as well as my win/loss average. If I choose to press, at times I will become less selective and, in doing so I often, but not always, see those trading stats decline. Which is perfectly ok, so long as I also expect it and then offset any additional risk I take by using tighter stops and smaller position sizing.

The point here is that whatever analysis you undertake to evaluate a potential trade (technical, fundamental, sentiment, etc.) in most cases you want the factors to be lined up in your favor. Where most people have trouble with this is that they think they can simply use a check list in every environment they face to produce consistent results. Unfortunately, the market doesn’t make it that simple. At times, you must learn that extreme sentiment readings (like oversold stocks in an oversold market) outweigh the poor technicals for example in terms of your risk/reward evaluation. At other times, perhaps fundamentals (like a stock trading so far below its book value) outweigh poor sentiment and poor technicals.

And, yes, it also works the other way around. For example, not making a trade (but adding it to the watchlist instead) in a stock where you really like the fundamentals but can’t justify the buy yet because the stock is currently too overbought in an severely overbought market. Evaluation of all of these factors is really the tricky part and why I can’t really provide you a simple risk/reward checklist to generate your own low-risk high-reward setups because not only is each trade different, and the market conditions itself change so your strategy and analysis of it must adjust. This is where experience and skill plays a significant role in trading successfully.

The point here, however is not difficult to understand and begin to implement on your own. Whatever process or analysis you use to determine whether to buy a stock or ETF (I hope more than just pulling up the chart and saying “XYZ looks nice here”) the factors need to be well in your favor and this will help eliminate overtrading and/or forcing trade setups that have a high failure rate which is two enemies of every trader.

Finally, I must address your question whether my profit goal is always 10 times more than my stop loss. In many cases it is because I typically will gear my entry point relatively close to my stop level (like a stock that I like fundamentally and which has also become oversold in an oversold market but hasn’t violated its ATR). But, I don’t want you to think that I’m always gunning for 10 baggers which I’m not. Sometimes a 5% to 10% profit is fine for a very short-term position especially in a choppy market not providing many attractive setups. Although I always like to find and exploit home run situations, the truth is that trading in a way where you’re only looking for home runs is not going to produce the results you desire. Single-based hits, and doubles on a routine basis will pay your bills much faster than the catching the occasional home run. In fact, I prefer more consistent gains than home runs because home runs tend to boost your ego and ultimately push you to make riskier trades than you should and that’s always a dangerous combination.