Several readers have asked questions regarding how to execute trades to achieve a favorable risk-to-reward level. This is a most important topic; I find that many traders are losing traders, not because they fail to detect market direction, but because they fail to execute good trades that exploit that direction. Most often this means that they enter long trades after significant strength has already materialized and vice versa. By the time they chase the move, it's natural for a retracement to occur. Aware of the need to cut losses, they bail out after the retracement--only to see the market move their way eventually.
That's a big part of what traders mean by getting "chopped up". Very often, getting chopped up means getting direction right, but executing poorly.
I like using the NYSE TICK to guide my execution. If we're in an uptrend, for example, we should see TICK pullbacks at successively higher prices. I will look for the most recent notable price low and then will wait for a several minute pullback in TICK. If that pullback cannot move price below the most recent low, that becomes a spot where I consider either entering a long position or adding to one.
Should we actually break below that most recent low subsequently, that would stop me out. As a result, the distance between my entry point and the most recent low is my defined risk. The defined reward is the distance between my entry point and the next relevant target. (Price targets are posted each AM prior to the market open via Twitter). As long as the distance to the target exceeds the distance to my stop by at least a 2:1 factor, I'm willing to take that trade.
The key to making this execution approach work is being patient enough when you're a buyer to let sellers "take their turn"; when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend; their exits will help your position. Much of execution boils down to patience and letting buyers and sellers *show* you that they cannot move markets higher or lower.
I'll be posting examples later this week. Thanks for the queries. In the interim, see this post on trade execution and this trading example. Note that these ideas are relevant for swing trades as well.