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Quiz · Swing Trading · Beginner

Green Light or Walk Away? A Trade Setup Quiz

A trade setup quiz full of charts that look tradable at first glance. Check the trend, the level, the reward-to-risk and your own limits, then give your verdict.

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

What it tests

Whether you can check a swing setup's trend, location, reward-to-risk, event risk and size before you take it, and pass when one check fails.

Buy 300 shares at $25.00, stop $24.00, target $27.00. Before a ticket like that goes in, it has to survive a short list of checks. The trend should point your way. The price should sit where buyers have stepped in before, the target should pay enough for the risk, and the account should be able to take the loss if the stop fills, including on a day when the stock opens far below it because of news that arrived overnight.

Skipping a trade is free. A bad trade at full size costs the stop, the spread and sometimes the next day as well, because the urge to win the money back arrives with the loss.

The sum behind every verdict

Reward-to-risk compares what the target pays with what the stop costs, both measured from the entry. Size comes from the dollar risk. How good the chart looks has no place in it.

If that trade loses, it costs $300. A win pays $600. Those numbers hold only if the fill matches the ticket and the stop can be reached in an orderly market. They also assume nothing scheduled sits between today and the target.

Reading the setups

Each question describes the chart in words. You get the trend, the level and the prices on the plan. Work out the R and the dollar risk yourself before you read the options, since an option that sounds sensible is often the one that breaks the arithmetic. Some right answers are passes. Some are smaller trades.

When you pick the wrong one

A wrong answer tells you which check you skipped. If you took a trade with an earnings report two days out, study the gap between the stop and the next open; if you sized by habit, go back to the dollar budget and redo the division in the position size calculator. The page on the reward-to-risk ratio works through more tickets. The course Hands Off the Buy Button turns these checks into a written filter, and its lesson on a pre-trade filter shows how to decide before the chart is open, while you are calm and have not yet fallen for the setup in front of you. Retake the quiz a day later. Hide the reasoning first.

Pick an answer to mark it

The questions

  1. The situationA stock has made higher highs and higher lows for months. It pulls back to $50, a level where it turned up twice before, and forms a higher low there. The plan: buy at $50, stop at $48 under the pullback low, target $56 at the prior high. The $2 risk per share fits your usual budget.

    1Green light or walk away?
    Show the answer

    B: Take it: the trend, the level and a 3R payoff all line up. Risk is $50 minus $48, or $2 a share, and the target pays $6, which is 3R. The trend is up, the entry sits on support that has held before, and the loss fits the budget. Doubling size breaks the budget, and buying above $56 leaves no room to the target.

  2. The situationA stock has swung between $40 and $50 for two months. It is at $45 today. The plan: buy at $45, stop at $42 below a minor low, target $48 just under the top of the range.

    2What is the right call?
    Show the answer

    A: Walk away: it is mid-range and offers about 1R. Risk is $3 and reward is $3, so the trade pays 1R. The middle of a range has no location edge: support and resistance are both far away, and price can wander either way. A $55 target assumes a breakout nothing on the chart predicts, and a stop ten cents away sits in ordinary noise.

  3. The situationA clean pullback setup: buy at $30, stop at $29, target $33, which is 3R. Your usual risk is $300, so you would normally buy 300 shares. The company reports earnings after the close in two days, and the trade would still be open.

    3Which plan fits the risk rule?
    Show the answer

    C: Pass, or trade a size you could afford to lose on a gap far past the stop. A stop order cannot fill during the overnight gap. If the stock opened at $26 after the report, 300 shares would lose $4 each, or $1,200, four times the $300 budget. Event risk calls for a pass or a size built around a gap, and moving the stop closer does nothing about a price that jumps straight past it.

  4. The situationYour account is $40,000 and your rule risks 1% a trade, which is $400. A setup appears: buy at $80, with the logical stop below the swing low at $72. You usually buy 200 shares.

    4How many shares does the risk rule allow?
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    D: 50 shares, with the stop left at $72. Risk per share is $80 minus $72, or $8. The budget of $400 divided by $8 gives 50 shares. At 200 shares the trade would risk $1,600, or 4% of the account. Moving the stop to $78 only to keep the share count puts it where the idea is still intact, so a normal wobble stops you out.

  5. The situationA small stock shows a setup. The quote is $10.00 bid and $10.40 ask, and only a few thousand shares trade a day. The plan was drawn from the last trade at $10.20: stop $9.60, target $11.40, which looked like 2R.

    5If a market order fills at the $10.40 ask, what does the trade offer?
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    A: About 1.25R, and the stop may fill below $9.60 as well. From a $10.40 fill, the reward to $11.40 is $1.00 and the risk to $9.60 is $0.80, so $1.00 divided by $0.80 is 1.25R. In a thin stock the exit can also fill well under the stop. The spread is a cost, and it calls for a limit order or a pass.

  6. The situationYour plan stops trading for the day once losses reach $600. Your trades today lost $350 and $250. At 2 p.m. a textbook setup appears on your watchlist, with a tight stop and a 3R target.

    6What does the plan say to do?
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    C: Pass: the limit is reached, so log the setup and review it tomorrow. $350 plus $250 is $600, so the daily limit is hit. A loss limit has to hold on the day a good-looking setup appears after it, since that is exactly when it gets tested. Logging the setup keeps the information without putting money on it.

Readers also ask

What reward-to-risk ratio should a swing trade have?

No rule sets a minimum. Many traders write down their own floor, such as 2R or 3R, so a run of 1R losses can be paid back by a smaller number of winners. Fix the floor before you open a chart and pass on anything below it, however good the picture looks.

Is it a mistake to skip a setup that later works?

A skipped setup costs the account nothing. Log it anyway, with the entry, stop and target you would have used, and check how it played out a week later. A record of passes shows whether your filter throws away too many winners or keeps you out of the trades that would have hurt.

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