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Market Lab Report
Question on 3:1 risk/reward ratios and price targets

Q: Was wondering if you used any criteria to determine if you are taking a trade for example, that has a 3:1 Risk/reward ratio. For example, if one uses a 10% stop, I suppose you would only take the trade if you believed the stock would appreciate at least 30%. This brings me to two related questions.

(1) Do you use target prices to determine your risk / to reward ratio so that you can then determine if one should take the trade or not ? If so, do you have any accurate way of estimating target prices ? (ie use analysts target prices ?)

(2) Do you use anything to determine whether a stock is extended or overpriced, where you would not even take a position if a valid pocket pivot if it occurred ?


A: I don't use mechanical methods like this to"measure" risk/reward. To me, it implies that I know how far the stock will go, which I never do when I buy a stock. So here's your two quick answers.


1) No. I go with strong price/volume action until it begins to waver.

2) If it's 80% or more above the 200-day moving average, it might be more risky to buy.

First published: 4 Oct 2010
Last updated: 5 Apr 2012