Profit to stop ratio

[jkeech]

Hi Marcus,

There seems to be some confusion in what minimum profit to stop (or profit to loss ratio) I should be looking for when deciding on a type 1 trade.

Assuming all other criteria show up ok for the type 1 trade, should my minimum profit to loss ratio be 1.5 or 2.5 ?

This needs some clarification, as its easy to arrive at the same number depending on your interpretation of the maths ...

So, let me specific about the numbers.

I'm trading options, but for the sake of the question I'll base it on stock prices using the Advanced GET chart.

I buy a call option when the stock price is $100.

My stop loss would be to exit if the stock comes down in price to $50.

Therefore to achieve the desired minimum profit to loss ratio, does my stock need to have a potential profit target of $125 (R/R of 1.5) or $175 (R/R of 2.5)? (... therefore making a potential profit of either $25 against my possible loss of $50, or $75 against $50).

If its $125, then that's fine - there are lots of trades available.

However, I've been trying to do it based on the $175 figure and I
haven't found any type 1 trades which meet this minimum ratio (given that I don't enter until after the DMA break + I use a stop loss exit 2 Fibonacci levels the other side).

Your help and clarification of this calculation would be most appreciated, as I have been getting some confusing answers on the bulletin board on this topic.

Regards, John.

[mhamric]

John,

Just so you know Marcus is on vacation this week. He will be back in the office on Monday, August 18th and should be able to reply to your post then.

[Nate McCartney]

jkeech,

In Marcus's absence, I will direct you to a few recorded sessions, in which the topic of Reward/Risk are covered. You can view these events any time you like. They cover the basics of the Advanced GET program from how to load a chart to forcasting using the program. I hope you find it helpful. I believe the R/R discussion is in session #2 done on 7/16/2003. Please let me know if you have any questions. Here is the link:

https://esignalevents.webex.com/esig...53073761515717

You will need to select the Recorded Sessions link to the left, and then look for my name. The sessions are titled Introduction to Advanced GET.

Nate McCartney
eSignal Advanced GET
www.esignal.com/advancedget

[MAR001]

Nate, have you used any of the point &figure features and are you better off using in adv charts or reglar signal charts. Also are they daily or can you get interday.
Waiting for your words of wisdom mj

[Nate McCartney]

mj,

I much prefer the Advanced Charts. I like the flexibility they have. I do not use the Point and Figure charts. That is probably mostly due to the fact that I "grew up" using the Advanced GET product, and am used to the features therein. As for a time frame, that will depend on the market being traded, and the duration for which I would like to stay in the trade. I like certain tools on a one-minute to three-minute time frame, and use others on a 60-minute/Daily/Weekly time frame. I'm sure that doesn't completely answer your question. Feel free to ask again in a different way, and perhaps that will spark me into understanding exactly what you are after.

Nate McCartney

[MAR001]

Nate, I think it is only offered in Daily format from what I can see. It is an option for adv chart and std chart and just courious if you have noticed the difference if any. The online rep thought the same thing (daily only) but was checking on it and going to email the answer to me. If you want a quick overview give a call. mj

[marginman]

Just interested in the answer to the original question. The answer for your profit target is for the issue to reach $250 if risk is down to $50......Right?

[Nate McCartney]

Going back to the original question: If a stock is being looked at as a buy at $100, and your risk is going to be a $50 loss, you must have a profit objective 1.5, in Marcus's scenario, or 1.618, for myself, in order to take the trade. I use 1.618 because it is a basic Fibonacci value. So, in our imaginary trade here, my profit objective needs to be 1.618 times my potential loss. 1.618 times $50 gives us $80.90. Therefore, my profit objective must be at least $80.90 above the buy price, or a price of $180.90. I hope that is clear enough.

As a side note, using 1.5 as your reward/risk ratio would make is so that you would have to have a profit objective at or above $175.

Nate McCartney

[marginman]

Right on Nate.....I used 1.5 multiplier but multiplied by 100 when I already knew that risk is 50....da....forgive me, I am still recovering from fever and flu like symptoms after my recent mishap.

[MR]

There seems to be some confusion in what minimum profit to stop (or profit to loss ratio) I should be looking for when deciding on a type 1 trade.

In seminar video tapes Tom Joseph and Andy Bushak teach we should have a 1.6 risk/reward ratio. Andy calls it reward/risk ratio. (Same thing)

you must have a profit objective 1.5, in Marcus's scenario...

Again, look for a 1.6 or greater risk/reward ratio. However, who's going to argue about a fraction of a percentage when a good, quick trade jumps out?

Thanks Nate and Mark for helping here. Hope this helps clarify things.

[jkeech]

Yep sure does - many thanks.

Would you agree though that you find very few true type 1 trades which meet this criteria, if you wait til price passes through the high/low of the previous day's action, assuming its close was also above/below the DMA or RTC?

If you take the ratio from the breakout point there is of course less trades filtered out, but taking it from the true recommended entry point seems to filter out many trades.

[MR]

No, finding a 1.6 risk/reward really is not hard to find.

No, John, I just politely but firmly cannot ever agree with this premise. Type 1 trades with a 1.6 risk/reward ratio are not hard to find.

To some degree calculating risk/reward has an element of subjectivity to it. On the surface it is not always as clear as we think. We are taking intelligent guesses where a buy or sell area is, where a target is. Yet I might be able to anticipate better than you a higher risk/reward potential because of my experience, strong visual skills, higher level Elliott Wave knowledge? I take the trade at the Ellipse and stop below it because I see a 5 ratio possiblity; you don't trade because you only see the previous high as a target and it is not a 1.6 in your mind as it crosses the DMA or RTC.

Over the past three or so years I have tried to create good examples of Type 1 buys and sells. If you had the time to review the archives at Trader's Outlook there are dozens and dozens of good examples.
click here for Trader's Outlook archive

Let's highlight two real-time examples, YHOO and EBAY.

First example: YHOO. click here

Back in October 2002, when YHOO was around 15, I posted a chart suggesting one monitor for a Type 1 Buy setup. When I posted the daily, it was because I saw a very excellent risk/reward ratio basis a weekly chart. Looking at the daily it may have been harder to discern the real potential I saw on the weekly. You may not have been able to see the opportunity I did because you are just now learning the basics of this methodology, but I just knew in my heart this was going to turn out to be a good one. YHOO has since continued higher in a trend, yesterday closed @ 31.84, never trading below the first Type 1 buy setup.

Second example: EBAY click her to see original post Type 1 setup idea

In February 2003 would you have bought into this Trader's Outlook post suggesting you monitor for a Type 1 Buy soon? John, I really am not a cocky person, but at the time I would have paid people to take this trade idea because I was so confident in its potential. Load up a daily EBAY, go into the "Training Mode" and back it up to Feb '03. Tell me if you see a 1.6 or better risk/reward? I bet you do not, but my friend I genuinely really did see a 3 or higher 'banger' or whatever Peter Lynch calls it? It was around the 70's; Friday, it closed around 111. to see the last EBAY post, click here

Finally, one more real life Trader's Outlook example. Would you have been able to identify this Wheat contract's Type 1 Buy setup as having a 1.6 risk/reward ratio or better? click here to see a real Type 1 Buy setup

The real point of all this, John, please don't concentrate so much on the question "is it a 1.6?" Rather, can we get beyond this to see the bigger picture with greater potential.

Take care, and hope you have a great weekend.

Sincerely, marc

[jkeech]

Some excellent examples, thank you Marc for your time again in helping on this.

I'll now look at the weekly also to get long term MOB targets and expect to be in a trade for perhaps a few months, providing both the weekly and daily line up.

Ellipses have also clicked into place for me too today - thanks for that also. I presume then based on what you last said, that if the price movement bounces of the ellipse as expected then you'd enter there - rather than waiting til the DMA or RTC breakout?

... to qualify this further - using the short term ellipse for an aggressive approach and the normal or perhaps long ellipse as a more conservative approach but possibly missing the trade altogether in this latter case.

[MR]

Hi John,

If it is ok with you I will return to the subject of Ellipse and try to answer your Ellipse questions next week.

When I do post something I will not post it here, but either at another thread related to the Ellipse topic or at the AGET User Group in File Sharing.

Take care, looking forward to helping you more next week, sincerely Marc