For the benefit of subject let us just recap on the Risk – Reward in day trading methods. The two Risk-Reward methods that one can use to determine and choose from are

• Percentage Risk Method

• Percentage Volatility Method

Percentage risk method:

In this system you determine the percentage of your capital that you might Risk on each Trade against the reward that you are expecting from the trade.

Percentage Volatility Method:

You calculate the risk per contract using volatility

Now for the second most important tool in the arsenal of traders

Volatility:

Another very important tool in the arsenal of a trader is standard deviation. We hear daily about volatility and how volatility wiped out traders who were on the opposite side of the market! Now then, the question arises how do you measure volatility and how do you know which side of the market you should be? The answer is simple and is in the basic principle of physics “the bell curve”, in lay man terms and in perspective of trading…an instrument moves “X” percentage of time in one range and “Y” percentage of time in another range and “Z” percentage of time in yet another range from its mean.

Example

If the Mean (nothing but the Average) of the stock for x number of days are 100, then stock will be in a range, i.e.:

100 – X or 100 + X for a certain percentage of time

100 – Y and 100 + Y for a certain period of time

100 – Z and 100 + Z for certain of time

Now for what is X, Y and Z

X is 1 STD deviation from Mean

Y is 2 STD deviations from Mean

Z is 3 STD deviations from the Mean

* 68% of the time stock will fall within 1 standard deviation of the mean

* 95% of the time stock will fall within 2 standard deviations of the mean

* Almost all (99.7%) of the time stock will fall within 3 standard deviations of the mean

Scientifically everything stays 95% of the time below 2 STD Deviations, now you can use this info in 2 ways,

One is when the stock is trading more than 2 STD deviations from its mean you know that the stock price is over stretched and you can exit or go short. (This is just an example and not a trade recommendation).

Second is when the stock is trading less than 2 STD deviations from its mean you know that the stock price is over stretched and you can exit or go long. (This is just an example and not a trade recommendation).

This is one way of using STD Deviation; experiment with the different STD deviations.

Day trading methods are not necessarily loss making, use statistical and scientific approaches rather than rumors and tips, do your own home work and see the difference

Finally make sure you include Risk – Reward and Volatility for your advantage in your day trading methods.