powderpc
Education

An illustration of risk:reward analysis in short duration trade

COINBASE:BTCUSD   Bitcoin / U.S. Dollar
Tradingview makes it easy to plot out risk reward if you can't intuit it the correct price level to exit at.

In general, you want to make trades that have greater than 1:1 risk:reward. If your risk of loss is equal to your risk of gain then it's not worthwhile to make a trade as your probability based profit will be zero.

Looking here at the recent dip, assuming it holds, with a high of $9200 and a low of $7900 and an entry averaging (i.e. it could be multiple trades) $8050 you can see that at $8250 you'd make a profit, but the risk:reward would only be 1:1 based on the assumption that downside risk was $7900. If downside risk were lower than $7900 than you'd have less than 1 for risk:reward which would be decidedly a bad entry target.

Given that you want to enter trades where you have positive risk reward there should be a reasonable expectation of exiting at higher than 1 ratio.

Given that the move of 9200 to 7900 was about 14% and assuming a 50% probability of retracing to half that price movement, we'd be at around $8550, which is an area of support/resistance , making it a fairly likely target to hit.

Given that the 200 EMA is around $8900 and price action has moved through that zone every day during this recent draw down, there could be greater than 50% probability that the price will end back between $8550 and $8900. This isn't a precise analysis because my math skills are only so-so.

Setting an exit target of roughly $8500 would provide a 2.25 risk:reward ratio, satisfying the requirements for a profitable trade that showed a strong enough incentive for the trade to execute.

The key here is to understand what the probabilities are like for each price target and exit point with a bit of trading psychology and understanding of the market action (i.e. panic sellers vs. trading bots) thrown in.
Comment: The other key to risk reward is that by executing trades at the proper risk:reward price levels you offset the probability of loss over time in favor of a probability of profit given that not every trade will be a winner. Should you execute trades at 1:1 your probability based gain/loss over time will be close to zero.
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