Stock Trades with Attractive Risk/Reward Setups Tickers in this article: BSX, JAH, STZ, CEMP In trading there is always a tradeoff between risk and return. Ideally, profits (return) should be bigger than the risk on a trade. Making twice as much on winning trades, than what is lost on losers, means the trader only needs to win about 35% of their trades to make a profit. The reward-to-risk ratio is determined at the start of the trade, based on the entry, stop loss and target levels. All trade levels should be reasonable in light of the recent price action. The goal is to find trade setups that have 2:1, and ideally 3:1 or higher, reward:risk ratios. Here are four trade setups providing favorable reward:risk ratios right now.
Boston Scientific Corporation (BSX) 
Boston Scientific Corporation (BSX) is in an uptrend since October 2014. Since April, the price has been moving predominantly sideways. With the trend up, the bias is to look for long positions. Since May, the price is respecting a rising trendline, currently providing support near $17.40. Enter long near this rising trendline, but only once the price starts to bounce off it. That puts the entry point at $17.85, which is just above the July 2 to July 10 consolidation high.The stop loss is placed at $17.35, below trendline support and the recent consolidation low. Target for the trade is $19.40, which is a conservative estimate if the price breaks out of this sideways range (triangle pattern). Reward:risk is greater than 3 to 1.
Jarden Corp. (JAH) 
Jarden Corp. (JAH) is also in an uptrend, but has been moving sideways in a channel since February. With the trend up, long positions are favored. Between July 2 and July 9 the price consolidated, showing support is still present at the bottom of the channel. Buy a breakout above the consolidation at $52.39. That breakout occurred on July 10, but the price is still in vicinity of the breakout point. Place a stop loss at $51.04, which is just below the consolidation low and channel support. The target for the trade is $57.25, and requires the price breakout of the range to the upside. Reward to risk exceeds 3.5:1.
Constellation Brands Inc. (STZ) 
Constellation Brands Inc. (STZ) trended higher from October up to the $121.92 April high. Since then it has moved sideways. Support is between $114.70 and $114. This region was tested on July 7, when the price reached a low of $114.67. So far support has held and the price is consolidating just above the channel bottom. The consolidation high (July 7 to 10, so far) is $117.76; if the price moves above that it triggers the long trade. Place a stop loss at $114.62, below the consolidation low. Target is $128.75, and requires the price break out of the range to the upside. Reward to risk is 3.47 to 1.
Cempra, Inc. (CEMP) 
Cempra, Inc. (CEMP) saw a very strong move higher between December and March, but has been moving sideways in a narrowing range since the March $41.63 high. Since late March, the price is respecting a rising trendline, which is part of the a larger triangle pattern. Buy near the bottom of the triangle since the trend is up. Waiting for a breakout of the entire triangle is the more traditional approach (see: Continuations Patterns: In-Depth Look at Triangles). The price consolidated between July 1 and July 9 near triangle support. On July 10 it broke above the $35.60 consolidation high, signaling a buy. Place a stop loss at $31.84, and a target at $44.50. The target is based on an upside breakout of the triangle pattern. Reward:risk is 2.37 to 1.
The Bottom Line The reward:risk of a trade is based on the entry, stop loss and target levels. These should be placed a logical levels. If a target is chosen that is way outside of the normal price action of the stock, the reward:risk may appear grea,t but since the target has little chance of being reached it isn't an ideal trade. Set logical locations for the entry, stop loss and target, then assess the reward to risk. A favorable reward:risk doesn't mean the trade has a high probability of resulting in a win. It just means you don't need to win as often to turn a profit. It's recommended traders only risk a small percentage of capital on each trade.
Refine Your Financial Vocabulary Sign up to receive our FREE Term of the Day newsletter. Gain a better understanding all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter. Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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