How to Calculate the Risk/Reward Relationship of a Trade

By Rick Pendergraft

One of the basics investors need to know when making an investment decision is the risk/reward relationship of the trade. But just because it's basic and necessary doesn't mean you know how to calculate one. Today, I'll show you.

I always look at the risk/reward relationship before entering a trade. It doesn't matter whether it is a stock trade, an options trade, or a futures trade. The first thing I look at is the risk. And I always have a stop-loss point in mind to protect my investment.

Here is an example - a recent short-term stock trade I analyzed with my colleague Andrew Gordon...

The stock was trading at $86 at the time. A good stop-loss point would be a move below the 50-day moving average, which was at $84. If that happened, our loss would be in the vicinity of 2.5 percent. The chart showed clear resistance at the $96 level, so our target gain was $10 or 11.6 percent.

If we take the target gain of 11.6 percent and divide it by the target loss of 2.5 percent, it gives us a risk/reward ratio of 4.6. This is a very good risk/reward ratio.

I make trades only with a risk/reward ratio over 3.0, the higher the better. And when I combine this basic tool with the leverage provided by options (the type of trade I do most frequently), I can create extremely nice returns.

An Antioxidant That Can Help Prevent Prostate Cancer

By Dr. Ray Sahelian, MD

Wine lovers are probably already aware that red wine contains a powerful antioxidant: resveratrol. And Dr. Sears has written about the anti-aging effects of resveratrol in ETR. For instance, animal studies hint that it can help prevent weight gain and developing the symptoms of diabetes and obesity. But the health benefits of this antioxidant don't end there.

Researchers at the University of Alabama at Birmingham's Department of Pharmacology and Toxicology gave male mice, on a daily basis, the equivalent of resveratrol found in a bottle of red wine. They discovered that the mice were significantly less likely to develop prostate cancer. And those mice that consumed resveratrol but still got cancer developed less serious tumors.

Red wine has about two to three milligrams of resveratrol per liter. (A liter is almost 34 ounces.) But even if you drink wine fairly regularly, taking resveratrol in supplement form is a good idea. Most resveratrol supplements on the market have about 10 mg per capsule. Taking one or two resveratrol supplements a week is fine if you are also consuming many other antioxidants every day. However, if you hardly take any antioxidant supplements, you can take the resveratrol more frequently. You can find resveratrol supplements in most health food stores.

Word to the Wise: Palliate

To "palliate" (PAL-ee-ate) - from the Latin for "to conceal" - is to lessen in severity or make less intense.

Example (as used by Steven Polansky in Harper's Magazine): "I had held a hope that she would take my class, that I would have the chance not only to cope with but to help palliate her pain."

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These articles appear courtesy of Early to Rise [Issue #2393, 06-27-08], the Internet's most popular health, wealth, and success e-zine. For a complimentary subscription, visit http://www.earlytorise.com/.