As I figure, I probably have about a 60% chance that this trade isn’t going to work out. So why the heck would I even make this trade to begin with?
Because of the risk/reward that goes with making this trade.
You see, YELP has seen a surge of buying interest in recent days, going from the $17’s all the way into the $26’s.
Today you have a huge market rally and YELP is down over 3% on the day.
So my strategy is as follows:
– Wait for an ideal risk scenario where either the stock has to bounce, or I get quickly stopped out.
– Make the stop-loss where if the trade doesn’t work out, the minimum I lose is 4:1 to what I could’ve have made.
– Because YELP is so volatile and a high-beta stock – this is very possible.
Now let’s put it into practice.
– Bought YELP off of its 6-day upward trend-line (support)
– Bought near the previous lows of the day so that if it breaks those lows, I know immediately the stock is making a new leg down and that it is time to get out.
– Entry therefore is at $24.68.
– Stop-Loss is at $24.38 which gives me a maximum loss of 1.22%
– My Target is set at $25.91 (near break-even for the stock on the day), which gives me a target of 5%
– Overall then my Reward to Risk is 4:1
– That means that this type of trade setup only needs to work once out of four attempts for me to still make a profit off of it. That’s why with a likelihood of a 60% fail possibility, it is a risk i’m willing to take.
And here’s the trade setup. Red = Stop, Blue = Entry and Green = Target as I described above.
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