I’ve read about it many times before, but I didn’t apply as it requires a great degree of discipline and also I didn’t know exactly how. Today I read a blog by kunal00 at the “boom room” and he put it in a way I could understand and be able to readily apply:
A memeber sent me an email today asking why i held
NEOPovernight without selling a single share when the market got basted yesterday. He wanted to know why i didn't take the cash. The simple reason was reward to risk ratio.
I entered NEOP at 4.15 in chatroom. My stop was a bit under the 20dma so i was risking 17 cents. I had seen next level of major resistance in the 4.5s so this gives me a potential for 30-40 cents return for 17 cents risk. This is one of 3 or 4 reasons i held it overnight. To get a 2: 1 reward to risk ratio I had to have a target of at least 4.45. i SOLD MY FIRST 1/2 shares at 4.49 today for 7% gain. Now if my stop had been tighter then my target could have been less. Even though it would have been nice to take some profits at 4.3 or 4.35 I know that if i shortchange my r/r ratio’s overtime to less then 2:1 it will be very hard for me to make huge huge exponential returns as now I have to become and stay an amazing stock picker and hit a higher ratio of traders 70-80% winners. Where if you see guys like foustockpicks or johnwelshphd they make hundreds of thousands of dollars a year trading but they both only bat 50% on average for their win ratio. The reason is the r/r ratios.
If you manage risk at a 2:1 ratio (not taking into account that some of your boomers will be much higher than 2:1 by scaling out. Often on swings like blti, redf, sify i get 10 to1!!!!!!!!), you only need to be correct 35 percent of the time to make money. Let’s say you make 1000 trades over the year. 350 trades make $2000. 650 trades lose $1000. You have made $50000 ($700000-650000) see now u ahve made ursefl at least a lower middle class living! now do this! imagine if you can raise that hit ratio to 50% HOW MUCH U MAKE???????????????????????????????????????? GOOD MONEY
The keyword I noted was “stop order”. Having that set can define your minimum required target. And if that doesn’t make sense, then don’t trade it. Also, if you have a hefty target, then the stop order would have to have more room too.
Today the market gapped and ran to the tune of 1.5% with the Nasdaq even higher 2% and SMH over 4% due to mainly the INTC earning with its stock up 8%.
But my portfolio is ever worse! With all of my hodge podge long positions deep in red, sentiment spread over 40 for the past 2 weeks in a row, weekly MACD crossing over, NASDAQ bullish percent 10 day average crossing over, QE2 ending in June, “sell in May and go away” rhetoric in multiple forums, and davo912 telling me having been warned many times that SI has changed trend from up to down, I put on my bear hat and initiated positions in QID (ultra-short QQQ) two days ago on the big down day and ended up gotten run over big time.
Today while some of my long gained ground, this single QID position easily offsets it as it dived over 6%. This morning on the gap up I added to QID but the market did a gap-and-run. So the loss in QID has overwhelmed any ground gained by my loser longs, losing over $1100 in just 3 days while each day I tried to eek out $50 trades.
To make the matter worse, ETN, the one I need to rally the most because of my over sized ETN May 55 calls, BARELY budged today while the majority of stocks were on fire!! And I didn’t even pick that stock — it was a buy alert from the service I subscribed to.
And to my horror, the stock I married to, AONE, also went down > 2.7% — even losing the gap support!
All the “oversized” positions are down. I’m an utter failure.
As an icing on the cake (sorry I’m being sarcastic), my stops today hit the jackpot as well. GOLD gapped up and I set my target limit order. The gap and run missed the limit by 4 cents or so and retreated quickly toward the gap support. I sold half in order to protect my profit. It then rallied back up and hit my original target. OK, I lost some profits.
Then I patiently waited until the gap support area to enter a new long, with the stop 8 cents below a Fibonaci level. It bounced but then went back down to hit my stop which happened to be the Low of Day!! This was very paintful!
Finally, I tried to lower my cost of the VZ collar play. I entered sell order a couple of times but then I cancelled them. The I almost manually pressed the sell button when the 38 area didn’t produce any momentum but I chickened out. Look at the end of the day dip! Opportunity lost.
Today was another taunting day. Wow, after hours AAPL beats big time along with many other names like QCOM etc. When am I going to get a good break?!
Portfolio Value: $135,900.