The stock market is like a relationship: risk vs reward. How can I make such a comparison? Think of it like this.. You typically don’t want to go on a blind date with someone without knowing a little about them. Say you research them on the internet if you know their name, perhaps check out their social medias incase they are huge partiers and you may not be that kind of person, or maybe they have a criminal record that they haven’t disclosed. The point is you do your research and you form your hypothesis of that person based on some investigative research. You then judge if the risk of associating yourself to that person is work the potential reward, or is it too much of a liability and you decide to cut that loss quickly. The same goes with the market!
You don’t want to buy a stock blind without performing your due diligence just like you don’t want to date someone who would be more likely to cause you harm. Responding emotionally in a fight with a person correlates to reacting emotionally to a stock going against your favor or even if it moves in your preferred direction. Emotional trading like emotional relationships can cause more damage than it’s worth both to your emotional health and your bank account. That is why performing enough research, reacting appropriately, judging the risk vs reward, and making well informed, decisive decisions become your best friend to the market; as well as, in life. It’s crazy how much the stock market correlates to real-life situations.
How to Judge a Trade
Risk vs. Reward
The risk vs reward for a stock is determined independently. You can find the best resources to learn how to spot the optimum opportunity of a stock by watching Timothy Sykes Trader Checklist which can be found HERE and using his Sykes Sliding Scale which he teaches you ALL about in conjunction with trader checklist. Also, make sure you order The Complete Penny Stock Course written by Tim’s Student Jamil Alluch (Tim wrote the forward) to get the best statistical lessons on determining risk vs reward!
To dive a little deeper let’s analyze some examples based on what I have been practicing.
(Disclaimer: this is not an exact science and this is how I determine risk vs reward of a stock. This does not mean you should necessarily judge your stocks the way I do and never risk more money than you are willing to lose.)
This is a chart from back when I was paper trading thanks to StocksToTrade. $AXXA was a wonderful breakout chart as you can see from the Magenta colored lines drawn on this OTCPK (Over The Counter Pink Sheet). You might be asking how I knew to draw those lines in those areas, well, A SH*T load of studying. But using StocksToTrade is my secret to getting ahead of everyone else.
Each line represents my support and resistance zones. The bottom is support based on a longer-term chart, the middle is a potential resistance zone and same with the third line on top. This gives me an idea of when to start taking profits if price action doesn’t move in my favor or if it behaves the way I anticipated based on Level 2. To learn more about How to Read Level 2 DVD watch the DVD by Tim Sykes. His DVD has been my savior on many stocks – checkout my records tab up top to see all of my trades!
Long Term Risk vs Reward
When determining your relationship with a stock and its risk to reward ratio, you must look at multiple time frames; this includes, 1 day: 1 minute, 10 day: 15 minute, 1 yr: daily, 3yr: daily, 5yr: daily, even 20yr: daily – whatever it takes to understand the history of this stocks past performance.
While looking at the past performance one must ask themself:
- Does this stock have a history of spiking?
- Does this stock spike once and then fail?
- Can I see days where this stock spiked several days in a row?
- Was this stock a former runner?
- Does this stock have a history of gapping up?
- Does this stock tend to breakout and hold its breakouts or fail?
- Does the stock have a history of the first Green Day patterns working?
- What news catalyst drove the stock price higher in the past?
- What does the stocks previous volume look like when the stock spiked in the past?
- Is this stock in a hot sector?
- What are the overall markets trends?
- Does this stock have an SEC Filings I can familiarize myself with?
I hope you get the idea. There are many, many, many questions you must naturally ask yourself when deciding your relationship with the stock market and the risk to reward that comes with that decision to enter the ticker you’re investigating. The questions are basic, the answers sound simple, but always remember it’s not an exact science and just because the stock may rank highly on the Sykes Sliding Scale it is not 100% fool proof.
Answering the Questions
We will use the chart above to help answer some questions for this example.
Does the stock have a history of spikes? Let’s look above – Yes the stock has recently spiked within the 1 year time frame according to the StocksToTrade image above.
Does the stock spike and fail or does it continue to the next day? – Well, most of the time it looks that the first Green Day pattern works well enough. Even if the stock shows a higher red day after a nice first green day, that means that the stock opened higher than the day before which gives just enough time to sell at the market open when the OTC starts trading and failing, but you best be quick!
The spikes are compatible with high volume candles at the bottom of the photo under the candles. This is a good sign that the momentum should continue if the stock closed near its highs.
It’s hard for me to read the date on the news tab at the bottom left side of the image above to see if the agreement news correlates with the multiday spikes, but if I remember correctly, they did. This was when I was studying whether or not agreement news reacted the same way as contract winners that Tim teaches about. To further the research one would read the news piece and continue researching the stock by typing it into OTCMarkets or Google.
Determining Support and Resistance Zones
How do I determine support and resistance? First, study ALL of these video lessons on Timothy Sykes Penny Stocking Silver subscription like I have! You learn how to determine what support and resistance are based on the chart’s candles.
I will try and explain. look above.. see the tops of spikes? The bottom magenta line is based on the previous spike before that breakout at the end of the right side of the photo. See how that line touches multiple resistance spots from the past (left side)? That is my support zone since that is the bottom line.
The next (middle line) is my first resistance zone. See how it touches the tops of other past spikes but not as many and it is just above the first Green Day? That could be considered another top had the 2nd Green Day not broke out above it. That now becomes support for the 2nd Green Day. This is a great example (from what I understand) of what Tim calls “Resistance becomes support,” as far as I know.
That third magenta line at the top is now my last resistance line that I have drawn out based on previous resistance near the top of a past spike. My thought for this is if it spikes above that zone it is a multiyear/week/day breakout and that could truly go Supernova until the next resistance zone or until an offering or something toxic possibly stops it. That is when you would breakout the 7-step framework. This picture show that it could not breakout past that 3rd line and shows an idea of when to take profits (based on price action/level 2/chart etc.)
How Does Support/Resistance Show Risk Reward?
Breaking it Down
The risk reward is broken down by my lines that I drew. The closer my entry to the bottom line shows my risk is small and safer because it is near support. Furthermore that means if it retests that support level, it has a high chance of bouncing off of it and continuing to spike. Vise verse, if it breaks down too far below that support level then it could continue to fall further thus making it clear where my risk level is and I would not hesitate to cut that loss as quickly as possible.
The reward is the potential upside to the next resistance level hence my second (middle) line. This is determined by many different factor such as volume (watch Tims Spikeability DVD and TimDicators DVD). The days with unusual volume tend to lead to second day spikes. That helps determine the potential upside and why reviewing a stocks history plays an important role when’d determining a stocks potential.
When is it a Good Idea to Buy?
This is my Guide
Buying OTC First Green Days were my bread and butter when paper trading. This was my first pattern I learned to master. Here is an example of one of my screen shots using StocksToTrade paper trading on $KPAY.
In the photo above you ca see the previous end day to the left separated by different colors.. That day showed no interest and was a flatline until faint interest at the end of the day (OTCs don’t trade after hours). On the right you can see more volume and actual trading activity. The stock shows news of a bank guarantee for $30 million. Now this isn’t ideal news but it doesn’t matter my opinion of what news matters or not THE ONLY THING THAT MATTERS IS THE REACTION TO THE NEWS!!!! Don’t forget that!
Back to the example..
You have the spike, volume, consolidation (sideways price action) then the breakout (spike) in the afternoon. That spike above the the morning/consolidation high was my trigger signal to buy! You can see my green arrow to where I entered.
Now.. this is where you must make the decision based on past history/performance of the different time frames of the stock as to whether or not you think it is a good idea to hold over night or sell into strength before the close. This decision is Very important since OTCs do NOT trade after normal day trading hours. From the above example you can see I chose not to have that overnight risk and I sold into closing strength and locked in a safe single. (Visit my Profitly to read up on this trade as I posted EVERY paper trade publicly for complete transparency of my Entire trading journey! You can also click the Records tab above to see my trading track record.)
Key Note: notice the magenta colored line? That is one of my resistance zones which could have potentially become support. In this trade it was wise of me to take the single and not worry about the risk when I had a solid single especially when it spiked so far above that potential resistance.
Determining Overnight Risk
Risk vs. Reward
The Stock Market is Like a Relationship : You must perform your own due diligence when determining the risk vs reward. The steps I wrote above should help you with the very basics and is by no means everything under the sun that you must consider. Consider them guidelines. The best way to prepare your risk vs reward thesis is by study, study, study, studying! You can under prepare for the market but you can’t over prepare! That is why becoming a student of Timothy Sykes and investing in my education has been one of the wisest career decisions I could have ever made!
Thank you all for reading and I hope this helped with the basics of how I determine my risk vs reward when searching for stocks!