Low Probability, High Reward/Risk Trade

Below is a daily chart of Mcleod Russel Industries, which is sitting near its year-to-date lows as momentum diverges. The trend is clearly lower, but prices have successfully retested support at 83.50 and momentum is telling us that selling pressure was stronger in February when prices first got down to this level.

Click on chart to enlarge view.

At current levels, our risk is 50 cents and the potential reward is 32 Rupees. At 64:1, the reward/risk is so skewed in our favor that it's worth taking the chance and getting stopped out. There may be a few whipsaws before it works, or it may not work at all. The probability that this one setup results in a loss is high, but when these types of trades are taken consistently with the same amount of capital each time, the probability of coming out ahead is much higher. When your initial reward/risk is this elevated, it takes very few winners to offset the many small losses taken along the way.

The types of trades we take varies, but they all have one thing in common. The reward/risk needs to be skewed in our favor. And in the case of Mcleod Russel, it's very much skewed in our favor so it's worth a shot.

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Allstarcharts Team