In a previous post I presented the case for entering a counter intuitive-trade in the IWM ETF.
The price target for that trade was reached (not exactly $3.50 but close enough) today for a gain of $3.42 per share. It is important to define and quantify the reward / risk for each trade if one is to survive in this business. Most professional traders recommend and define the minimum reward / risk at 3:1, but how do you quantify it?
A good industry rule of thumb is to limit risk for any trade to a maximum of 1% or 2% or your account. For a $25,000 account, the maximum dollar risk would be $250 and the minimum profit $750. You can find the number of shares to buy for a given dollar amount of risk using the Stock Trade Calculator.
IWM 60 Min Chart
