We realize that not everyone is going to be staring at their computer or phone all day. At least we hope that’s the case—that’s the whole point of Wanderer! But the question we often get is what to do if I miss a trade alert and the price is higher than the official alert price?
Here’s some guidance on that. To get started, let’s break down this sample Trade Alert:
Bought 20% size of TMF @ $18.50
Target @ $20.00
Stop @ $18.00
So, you can look at this alert and quickly surmise that we’ve got a 3:1 reward-to-risk ratio here. $1.50 potential profit, and .50 cents risk.
Now, if we show up late to this trade, here’s how we would look at it:
Reward 1.50/18.50 = 8.1%
Risk .50/18.50 = 2.7%
Pretty straightforward so far. Using that information, we’ll figure out what to do in a couple of different scenarios.
Scenario #1. You log in, and the price is at $18.35. Great for you. Buy it at a lower price, reduce your risk, and increase your potential profit. Remember, as long as you’re within the first day or so of the trade; then nothing has likely changed in our analysis of the trade. All this means is that we entered a little too early and didn’t get to buy the low tick. By being a little late, you will get a better price than we did. A win for you.
Now, because your risk is only 35 cents, does that mean you should lower the stop price another 15 cents to $17.85? No, it doesn’t. Our stop prices are chosen for a specific reason. It’s likely that there is substantial support just above $18.00, and that’s why we’ve decided on this number. If it hits our stop, that means we believe that it will fall further from there. So, lowering your stop price would likely mean that you are going to increase your loss.
What about the target price? Same thing. Leave it alone.
Okay, scenario #2. What if you log in and the price is now at $18.65? Do a quick calculation and figure out what your reward/risk is from here:
Reward 1.35/18.65 = 7.2%
Risk .65/18.65 = 3.5%
By doing this you can see that your risk is close to 1% higher, and your reward is then about 1% lower. That results in a reward-to-risk of roughly 2:1. On a 20% portfolio-sized trade, 1% equates to .2% of your portfolio.
What do you do? Well, it’s entirely up to you and your risk tolerance. If it were us, we’d look to get it a few cents cheaper, and maybe shoot for $18.60. If you get it, great. If not and it continues higher without you, well, that’s just the way it goes with trading sometimes.
We wish there were some hard-and-fast rule about how much to chase, but there isn’t. Each trade is different, and the reward-to-risk is always different. If we have a R:R of 10:1 and by the time you show up it is 9:1, well that’s still a pretty easy trade to take. The upside far outweighs the risk. But in the example above you are down to about a 2:1, which is marginal, at best.
The point is, don’t chase trades too far. Use your judgment, but always use some basic calculations like the ones above to help yourself make an informed decision.
At the end of the day, when you log in late to a Trade Alert, you will find that about 40% of the time the price will have moved in your favor, and 60% it will have moved against you. The question becomes how much is too much.
So to recap, when you are late to a trade:
- Calculate the reward-to-risk and compare it to the original entry
- Do NOT change the Stop price
- Do NOT change the Target price
- Don’t chase, and don’t have FOMO (fear of missing out). There will always be more trades.