Is That a Good Trade?
When deciding to buy or sell a security or commodity, it is easy to overlook a key component of the trading decision—risk versus reward. If a market is in a bull trend, selling the top of a corrective phase may seem prudent. However, if the downside potential profit is three points, for example, and the upside potential loss if wrong is ten points, the trade simply does not make sense. Technical analysis can help to analyze the risk/reward potential, as well as point out immediately when a good trade goes bad.
What Makes for a Good Trade?
A few trendlines on a chart can identify when trading is excessively risky. A weekly chart of the Nikkei 225 Index in Japan (Figure 19.3) shows a clear four-year 6500-point trading range ...
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