Critique My Reward/Risk System

[cpatte7372]

Hello,

I wonder if someone could give me some feedback on my method of assessing risk/reward. I'll go through a live trade I'm about to take.

I am currently waiting to be stopped in with coca-cola (CCE) at $26.61. My stop is $25.96 and the number of shares I wish to purchase is 83. Therefore, I'm risking $25 should the trade go against me. Now, my risk reward ratio is 1.5:1. So, for every risk of $25 I hope to gain $37.5. The cost of those shares is $2609.

Now, with the help of Duane and Alex I have come up with this system which basically says for me to realise the minimum risk of 1.5:1 the shares would have to appreciate in price by 1.42% from the purchase price, i.e. the share price would have to increase to $32.09.

Now, with that in mind I would look at the price range over, say 3 days to determine if the shares ever moved by that percentage. If the price did have such a price range of 1.42% or more over 3 days I would consider the trade if not I would leave that trade alone.

Please let me know what you think.

Cheers

Carlton

P.S.

If you interested please check out recent post for an article that Duane provided on Risk/Reward

[cpatte7372]

I'm sorry, the cost of the shares is $1019. And the number of shares I wish to purchase is 38. The percentage that the share price would need to appreciate for me to realise my minimum risk/reward is $27.59. Therefore, the percentage increase would be 3.55%.

I was getting confused with another stock. However, the risk amount of $25 is still the same. Also, the method remains the same.


Sorry for the confusion.

Cheers

Carlton

[cpatte7372]

Hi,

Don't worry about it. After giving the idea some additional I have come to the conclusion that its not a good method of assessing risk/reward.

Thanks anyway.

Carlton

[JayF]

The way I assess Reward/Risk Ratio is by using the Fib Extention Tool. I set mine up as such...



I then click on my stop, then my straight up or down to my entry, and then back to my stop, but moving over to the right a bit to stretch out the lines. Here's what it looks like with a few helper notes manually typed in.



For a 1.5:1 ratio, you would need to type in 2.5 in the Fib area, not 1.5 (that would be 0.5:1... not good.)

[cpatte7372]

Hi JayF

Thanks for responding.

What if you don't have a Fib setup? Its my understanding that Fib is a pattern that needs to identified and not one that can be manufactured. As a result, it can't be used in every situation. Am I correct?

Cheers

Carlton

[soylent]

Carlton --

To figure out risk reward, I look @ a couple things:
a) TARGET: What should this stock go to based on my technical signal? Where is the 'low hanging fruit'? How far is it?

b) FAILURE: Assuming there are alternate players looking to take the opposite position, what is THEIR target?

c) @ what point can I determine we are going DOWN versus UP? (or, visa-versa)

Personally, I like the 'failure' to be really close and the target to be really far... Like 5:1. (e.g. Risk 3pts vs a 15pt win)

However, I constantly re-evaluate as the trade moves in my favor if the target is still valid. (NOTE: That was one of my biggest failures before! All these people / 'gurus' say stupid stuff like "Pros go broke taking profit early". BS. The market is dynamic -- if you don't like something, get out. Take your money. If it gets nice again, you can re-buy or get a diferernt trade. Winning makes winning easier... Something that drove me nuts was the AGET mob. I'd set a target on that in the early days and watch the price heading there then it would slow down and I'd say, "well, it will go up because when I practiced this it worked". Nope... And, there goes my profit. MOBs are nice but you never know if THIS is the time we hit a 50% or 68% retrace and stall... Anyhow, I digress... But, I REALLY love RTC's (regression trend channels), CCI, and moving averages... And, I still like AGET but in moderation / w/ skill... )

-c

[JayF]

You're right... Fibonacci tools are typically used to help identify patterns and significant levels of Support and Resistance.

The use I was referring to was to use it as a measuring tool. I like to visualize where my entries, stops, and targets are, and using the Fib Extension tool in the way I mentioned can be utilized to measure a Risk / Reward ratio.

For instance, if I had a trading strategy that required a minimum 1.5 to 1 Risk/Reward ratio, then I can measure my risk with the Fib Ext tool, and my minimum target to meet my 1.5 to 1 ratio will be placed at the 2.500 line on the Fib Tool. Here's a recent example... below you'll see a possible entry point where the blue arrow is, and a Red arrow for my Stop. Before I take this trade, I'll measure the Risk/Reward ratio with my Fib Tool, and we can see that my minimum target price is at ~1125.50, which falls in line with where the Mob is (the pink/light blue bar.)

So in this case I'm not using the Fib Extention to project future price movement, but instead my minimum price target to meet my Risk/Reward tolerance.

[soylent]

Carlton --

Here's a sample using AGET trading futures...

The key, to me, is: Wait until your perfect setup shows itself. When it doesn't -- do something else...

Also, since I was a little hard on 'mobs', I think I owe an example of them working dead-on. Do they always work? Almost always when used in conjunction w/ a pullback to ZERO on the GET OSC and a trend break w/ a proper wave count.

Now, I sit & wait for another perfect setup... Browse this board, etc...


-c

[soylent]

Uhg -- posted the wrong chart. THIS should be the right one...

I mix AGET w/ CCI to get better results...

-c

[cpatte7372]

JayF,

Thats a great explanation of a way to utilise Fib. Cheers mate.

Soylent, its amazing how looking your chart makes me feel I should learn more. Then there is the school of thought which states that one should stick with what works for you. I'm using MACD Impulse to identify trades, but it appears so simple that I feel I should learn MOB, or just something inaddition to MACD Impulse.

Thanks guys.

Carlton

[cpatte7372]

Soylent,

I think you're right on the button when you say that the key is to wait until the right setup emerges. The problem for me is patience....

Carlton

[DuaneG]

Hi Carlton,

I think your frame of mind is a good one. Building a suite of technical studies that works well for you is often a process of trial and error. This is a very personal thing, as what works for one successful trader may not necessarily work for you and vice versa. Spend some time constructing different scenarios and I'm sure you'll come across a system that meets your needs.

[cpatte7372]

JayF/Soylent,

Would you guys happen to know where I can found stocks that are traded on both the London Stock Exchane and and NYSE?

Cheers

Carlton

[soylent]

Carlton --

I don't trade on London -- so, can't help there...

As for what I do / how I work:
Duane is right -- use what works! 'Knowing' what I know now, I could trade w/ just price & volume... But, I couldn't back in the early days.

I don't need AGET, but I like it and it confirms what I'm looking @. ESPECIALLY on 'big indexes' -- it's priceless... Considering I spend on commissions the cost of AGET every day, it's a no-brainer.

Your Momentum (momo) indicators are right-on. I traded them for a while (looking for momo in daily, hourly and looking for buys on the 5minute). It works. Overtime, you'll discover other things that work. ALL indicators tell you, basically, the same stuff so just get good @ one of them -- any of them.

-c

[helenquenet]

I don't have a list of those traded on both exchanges but it would probably be worth checking the top 15 or so of the FTSE100. I know you trade VOD, AZN, BP, REX, GSK, ICI and BOC from my own experience but I don' know of any list anywhere. If you come across one I'd really like to see it too

Cheers