Risk and Reward Ratio Based on our Mapping Method

We will talk about this subject in greater depth in the next lesson. For now, we will show you how we decide the RR ratio based on where the market is trading.

After all the maths and calculations of the previous few sections you will find this very straightforward. The mechanics are simple, when trading against a possible trend our RR ratio should be always higher than the RR ratio of a trade in direction of the trend. This because a trade in direction of the trend has a higher probability of success, so since it is riskier to trade against a possible trend, we should be willing to gain more.

Note we use “possible trend” because we still do not know if the market is going to trend. We have a much better indication when the market breaks HOPS1 or LOPS1.

Use the following guidelines:

When the market is trading between HOPS1 and LOPS1

A trade off the pivot point in either direction, we use a RR ratio of 2:1
A trade in direction of the possible trend, RR ratio of 2:1
A trade in against a possible trend, RR ratio of no less than 3:1 (i.e. a bounce back from HOPS1)

When the market is above HOPS1 or below LOPS1

A trade in direction of the trend, RR ratio of 2:1
We never take trades against an identified trend

When the market is above both HOPS´s or below both LOPS´s

A trade in direction of the trend, RR of 3:1
We never take trades against an identified trend

When using these guidelines we are always going to be ahead of the game.