The Mindset of Investing

The level at which you go long has nothing to do with your stop-loss; it’s tied to something else—your profit target.

Let’s say a certain instrument is currently trading at 800. What does “go long with a 100 buffer” even mean?

Scenario A and B.

Here’s what A thinks: The instrument needs to drop to 100 before going long. When exactly? When it hits exactly 100. And when to stop out? If it breaks below 100. Is this even feasible? Could it possibly land exactly on 100 and then bounce without breaking lower? A doubts this himself, so he adjusts: go long at 101, stop out if it breaks 100. That’s his interpretation.

Now ask B to evaluate A. B would think A is completely off his rocker. If the target is 2900, there’s no need to wait—buy right now at 800. Dropping from 800 to 100 gives a 700-risk stop, while the upside to 2900 is 2100—a 3:1 reward-to-risk ratio. That’s tradeable. Why in the world would you wait until 101 to enter? That would give a 2799:1 reward-to-risk ratio. Such an amazing setup—why would it ever come to you?

Same phrase, two entirely different interpretations.

Calculating the target and evaluating the reward-to-risk ratio is where the real edge lies. Waiting for price to hit some magical number to reverse—that’s no different from ancient divination with turtle shells.