The fine print of trading and investing

Quiz · Swing Trading · Beginner

Choose Your Entry: A Quiz on Planning Entries, Stops and Targets

Planning entries, stops and targets comes down to three prices and one division. Compare the plans in each question and pick the one the numbers support.

AI-assisted, reviewed by the The Margin Report human editor: John James → Marked as you go Published

What it tests

Whether you can compare trade plans by reward-to-risk, place a stop where the idea fails, size from ATR and check a target against resistance.

$1 of risk to make $3. Every swing plan reduces to a sum like that, and the sum depends on three prices you choose before the order goes in: where you buy, where the idea is proven wrong, and where the stock is likely to meet sellers. Move any one of them and the trade changes, which is why two traders can buy the same stock on the same day and hold very different bets.

How the entry moves the R

Two dollars higher on the entry cost more than half the payoff ratio. Nothing about the stock changed. Only the price you paid did.

The stop has to come first. It goes where the reason for the trade stops being true. The entry and the share count follow from it.

Working the questions

Each question lays out one or more plans with prices. Do the subtraction for risk and reward before reading the options, then check whether anything on the chart sits between the entry and the target. Write the R down. Then ask what each plan needs the stock to do next. Some plans look generous only because they ask for a lot. The reward-to-risk ratio page has more worked tickets if the division feels shaky.

If you get one wrong

Redo it with a pencil, one line for risk and one for reward. If the target was the problem, the answer on how to set a profit target on a swing trade covers where targets come from. If you liked the breakout plan too much, read swing the range or stand aside. The position size calculator turns any stop you choose into a share count.

Keep a note of which kind of mistake it was, since a trader who keeps overpaying on entries has a different habit to fix from one who keeps setting targets past the obvious ceiling, and a short list of your own repeat errors will do more for the next real plan than a perfect score on a second attempt. Start that list today.

Pick an answer to mark it

The questions

  1. The situationA stock in an uptrend has pulled back toward support. Both plans use a stop at $19 below support and a target of $23 at the prior high. Plan A buys at $20 as the stock turns up off support. Plan B waits for more confirmation and buys at $21.

    1What reward-to-risk does each plan offer?
    Show the answer

    A: Plan A 3R, Plan B 1R. Plan A risks $1 ($20 to $19) to make $3 ($20 to $23), which is 3R. Plan B risks $2 to make $2, which is 1R. Waiting for confirmation raised the entry by $1, and that dollar came off the reward and went onto the risk at the same time.

  2. The situationA stock trades at $50 and its average true range is $2. Your rule places the stop 1.5 ATR below the entry, and you risk $300 a trade.

    2Where does the stop go, and how many shares fit the budget?
    Show the answer

    B: Stop $47, 100 shares. 1.5 times $2 is $3, so the stop goes at $47. At $3 of risk a share, $300 buys 100 shares. The ATR sets the distance, and the budget sets the size. A $48 stop is only one ATR away and breaks the rule.

  3. The situationA stock has a ceiling at $40 and support at $36. Plan A buys a breakout at $40.50 with a stop at $39 back inside the range and a target of $45. Plan B buys a pullback at $36.50 with a stop at $35 below support and a target of $40 at the ceiling.

    3Which statement is accurate?
    Show the answer

    C: Plan A offers 3R and Plan B about 2.3R, and each depends on a different level holding. Plan A risks $1.50 to make $4.50, which is 3R. Plan B risks $1.50 to make $3.50, about 2.3R. Plan A needs price to stay above the old ceiling; Plan B needs support at $36 to hold. The R tells you the payoff and says nothing about which level is likelier to hold.

  4. The situationPlan: buy at $30, stop at $28.50, target $36. Between the entry and the target, $33 is a level where the stock reversed three times last year.

    4What does the $33 level do to the plan?
    Show the answer

    D: It makes $33 the realistic first target, cutting the plan from 4R to 2R. Risk is $1.50. To $36 the reward is $6, or 4R. Sellers have met the stock at $33 before, and to there the reward is $3, or 2R. A target beyond resistance counts on the stock clearing a level it has failed at, so plan for $33 and treat anything above it as a bonus.

  5. The situationPlan: buy at $45 on a pullback, target $48. The pullback's swing low is $43.80. Stop option one: $44.80, which makes the trade look like 15R. Stop option two: $43.60, just under the swing low.

    5Which stop belongs in the plan?
    Show the answer

    A: $43.60, below the swing low, for about 2.1R. The idea is wrong only if the stock breaks the swing low, so the stop belongs under $43.80. From $45 to $43.60 is $1.40 of risk against $3 of reward, about 2.1R. A stop 20 cents away sits inside ordinary movement, and the 15R exists only on paper.

  6. The situationThe plan was to buy a breakout at $25, stop $24, target $28, which is 3R. By the time you look, the stock has run to $26.20. You are tempted to buy now with the same stop and target.

    6What does a $26.20 entry offer?
    Show the answer

    B: About 0.8R, less reward than risk. From $26.20 the risk to $24 is $2.20 and the reward to $28 is $1.80. $1.80 divided by $2.20 is about 0.8R. Chasing moved the entry past the point where the plan made sense, so the choice is to pass or wait for a pullback that restores the numbers.

Readers also ask

What is ATR and how is it used for stops?

Average true range is the average size of a stock's daily range over a set number of days, counting gaps. Some traders place stops a multiple of ATR below the entry, such as 1.5 times, so the stop sits outside the stock's ordinary daily movement. The wider the ATR, the fewer shares fit a fixed dollar risk.

Is a breakout entry better than a pullback entry?

Each asks for a different thing to go right. A breakout entry needs price to hold above the old ceiling, while a pullback entry needs support to hold. Compare them by writing both plans with prices, working out the R for each, and checking what would prove each one wrong.

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