One topic that I have been giving some thought to, is risk. We all know that there is a level of risk associated with taking any given trade. Assuming that we have a method that allows us to measure the risk prior to placing a trade, we know exactly what the level of risk is. This can be measured in dollars, or percentage of account value- normally traders use percent of account to measure R or risk.
If your trading style does not allow you to measure risk (entry price - stop price x number of shares), this there are other discussions that need to take place! I cannot imagine NOT being able to meaure my risk/trade, but that's just me.
Recently, I have been thinking not about the risk of taking a trade, but the account risk associated with NOT taking a trade. If you are trading a strategy that has a fairly high probabliliy of winners to losers, and you also know the average expectancy (reward/risk) per trade, then you also know the dollar risk of not taking the trade when market conditions and specific chart patterns set up.
This way of looking at trade set up's has really changed my thinking. Now, current market conditions make it tricky to find good trade set up's, so it's easy for me to sit on the sidelines and wait for better days (and think about stuff like this).
BTW, I trade a fairly high probability swing trade method, and I track all R multiples in a spreadsheet, so I know what my projected reward/trade is, as well as loss risk. How can I measure reward before the trade is taken? By looking at the upcoming resistance levels that price will face, and taking those trades that should have a 3:1 reward profile or better. In many cases the reward price exceeds the 3:1 level, so I am really trying to measure a minimum reward level.
In any case, using 3:1 allows my to look at the risk of not taking a given trade, compared to the risk of loss.
Give this some thought, in relation to your trading method, and you may see things from a different point of view.
