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A Trade Idea Based Solely On Risk/Reward

As some may be aware, I spent nearly twenty years making a living in a dealing room. Contrary to what many believe, those who are paid to trade are, in my experience, not necessarily smarter or better educated than those who pay for the privilege. They have better, faster access to information for sure, and they also have the focus that comes from concentrating on one market all day every day, but it is possible for anybody trading at home to get the same info and to specialize. There is, however, one major thing that sets floor traders apart.

Their role as market makers means that they often end up with positions that they didn’t intend to take and that leads to a completely different focus when observing markets. Rather than look first at the entry point for a trade, most professional traders concentrate more on exit points. Rather than ask themselves “where should I buy this” they ask themselves “if I buy this here, where will I sell it?” That view sometimes reveals a short term opportunity that is too good to miss.

Sometimes that even means taking a position that you are not entirely convinced about from a fundamental perspective, just because the proximity to a logical stop loss level means that with even a moderate price target the risk/reward ratio is strongly in your favor. I would argue that that is the case right now with Natural Gas, or more accurately with the U.S. Natural Gas ETF UNG.

UNG hit a low last week…




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