Whenever a successful business investor commits capital to an opportunity they have meticulously considered the risks associated with the future cash flows of the company. When we invest or trade a stock we need to follow similar "risk analysis" methodologies. Both technical and value traders will identify a price where their risk vs. reward is "positively skewed". This means that the amount of capital they are willing to risk is smaller than the reward they expect to gain. Other ways I have heard this concept presented is "buy low and sell higher" or "Risk 1 to make 3".
As a technical trader myself, I will look for a widely followed stock to first establish a directional trend and then look for periods of weakness in the current trend. These periods of weakness allow me to establish a "low risk" entry point. However, this is only the beginning. I then will measure the amount of risk I am willing to take before the market proves me wrong. Knowing the amount of risk before committing my capital allows me to understand the maximum draw-down to my overall portfolio.
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