Risk Assessment
Even stocks with good charts may still not be the best candidates to purchase. Does the chart suggest the risk we will be taking is worth the potential reward? Here, we measure the upside target or strength of the trend and compare that profit to the loss we will be willing to take if we are wrong (stopped out). A good rule to follow is that the reward must be greater than or equal to three times the risk we are willing to take. In other words, risking 3 points of loss on a stock that has an upside profit potential of only 5 points is not prudent risk management. Think of the racetrack, where the long-shot horse has a payoff of 10 to 1 or more. The favorite has better odds to win, and therefore the payout is much less in the 3 ...
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