Saturday, November 02, 2002 12:46:19 PM
LG ON FIGURING RISK/REWARD & STOP LOSS POINTS
Posted by: LG
In reply to: augieboo who wrote msg# 2053 Date:11/2/2002 8:40:02 AM
Post #of 2067
augieboo: I started answering your question and realized that
I’ve been doing what I do for so long a lot of stuff that just
seems intuitive for me begins to seem quite complicated when I
try to put it down in writing. I’ve decided the only way I can
answer this question without writing a small book (and I am not
inclined to write a small book) is to greatly condense my
reply. First of all, I don't say to my self, what is the risk
to reward ratio before I make a trade, I tend to do it now on a
more intuitive basis.
The first step is to determine at a minimum what you expect to
gain at a minimum. True, I don’t subscribe to measured moves
with respect to price/volume chart patterns. Although I do know
those measurements seem to work at times, just not enough for
me to place bets on them, IMO.
To determine buy and sell entries I rely a variety of inputs.
I’ve already shared one of my primary methods, using multiple
time frame analysis of a set of indicators coupled with various
methods to determine where possible support or resistance is
going to come into play. I’ve found buying (or selling short)
equities just before, right at or shortly after an equity makes
a reversal in tandum with a market pivot, be it intra-day or
longer provides an entry that often can quickly produce a
profit. This profit pad can be booked depending on how much of
a move I am expecting or it can be used to provide at the least
a break-even stop and in many cases a stop loss that is in the
money.
To determine how far I expect a stock to run or drop, I analyze
using various sources of input. Primary is technical analysis
using ob/os indicators, momentum indicators, support/resistance
targets. Secondary is some fundamental (only in reference to
how it will effect sentiment) and sentiment analysis. To break
the method down would require more writing and time than I am
inclined to spend now.
Once I’ve determined I am going to trade a particular equity,
which means I’ve determined it is ripe for a reversal or for a
continuance break, some of the ways I determine how far I
expect an equity to move is by the ob/os condition at my entry,
the prevailing trend, chart patterns and SRLs and trend lines.
Of course, I always prefer to time trades with the market in
unison, but this is not always done.
As a rule of thumb I do not make percentage evaluations with
regards to stop loss points. I usually evaluate the expected
minimum gain and make an assessment as to how much I am willing
to risk based on several factors I’ll outline later.
For a buck, I may be willing to risk a quarter. For two bucks
or more I may be willing to risk fifty cents. And on the rare
occasions I decide the position is worth averaging in, I may
risk more, but rarely more than a buck. I don’t recommend an
average into a position approach, but as I said on rare
occasion I do use it. Once a position provides enough profit, I
first move my stop to a break even point. The next move of the
stop is motivated by additional profit and an indication the
stock is beginning to move in the desired direction. Once this
occurs, I begin to trail the stop behind the move. I do this in
one of two ways. One of my methods is by moving the stop in a
stair step pattern by identifying intra-day support/resistance
pivot points trailing the price action. I use these trailing
pivot points as stop loss steps. My second methods is to set a
dollar amount trail. When I use this method I usually start out
with a deeper or more relaxed trail and tighten it up as I near
my profit target and or as the price action nears SRL depending
on my os/ob indicators.
A poor risk to reward stop would be if you were expecting to
make at a minimum a buck on a trade and you risk fifty cents or
more. If you are finding you need to risk at those ratios you
need to improve on your timing. Whenever you realize you’ve
made a bad entry, always allow your stop to take you out or
just back out of the trade early. The sooner you can learn to
determine you were wrong the less money you are going to lose.
Keep in mind, now days commissions are just to cheap to not
bail when a trade goes south. If you find you are bailing to
often, you need to pull back from trading and analyze what you
are doing wrong. Paper trade any changes to your methods if
need be.
No one can read every stock. If I am trading a stock and I get
it wrong three times, I move on to another equity. You can’t
read them all and even the ones you are reading well are only
on a honeymoon with you and honeymoons always end.
Beyond just getting the entry timing right, I think risk is
determined by a variety of other factors. Such as…
1 – The liquidity of the issue
2 - The volatility of the issue
3 – Confidence in one's read of the trade
a – Confidence in overall market direction
b – Confidence in the direction of the equity
4-Whether the trade is going to be:
a -a trade with the prevailing trend of the equity and market
b -a trade with the equity but against the market trend
c -a trade against the trend of the equity and against the trend of the market
d -a reversal of trend play for the equity without a market reversal
e -a reversal of trend play for the equity in tandem with a reversal of the market
5 – How many positions do I have in play at one time and how large is the position to be?
1st – I always set a price stop based on how many shares I have
in the trade, which determines upfront the maximum amount I am
going to risk. (Rare exception: I do on occasion make the
decision to average in, but this is rare and I do not recommend
it unless one is very confident. Even when I do average in, I
set an ultimate stop, once that is tagged I am out.)
2nd – I look for a pivot point or a support/resistance level at
which to set a stop just beyond or in front, depending on the
price action of the equity at the time of the trade. (Are other
traders tending to lag at SRLs or jump in early with this
equity.) This stop loss point must be with in the limits of the
1st. (Only exception being the rare exception mentioned above.)
After stops are set, I am always re-evaluating as the market
continiously provides additional input. However, unless I
decide to average in, I almost never lower my stops (or raise
in the case of a short sell) once set.
Regards,
LG
------------------------------------------------------------
Posted by: LG
In reply to: LG who wrote msg# 2065 Date: 11/2/2002 10:36:06 AM
Post #
Here is an example of my Intra-day Pivot Point (Trailing Stair
Step Stop Loss) Method...
I posted in advance that I expected NTAP to rise to 10 and
possible as high as 16. I began to buy at 5.95 and below. My
averaged position was 5.50. We shall see how this rally goes
for the 16, but the TEN is IN THE BAG.
Assume we made a fair timing entry on NTAP a little above the
10/8 low (and we did..gg). I then wait for the first move up
and subsequent jog down to establish a higher low. The thin
horizontal gray line (higher high) is used to put into to play
the higher low pivot point (thick gray line) to be used as the
next stop. Once the price action moves above the pivot high
(not just a penetration) from which the pivot lows was
established, that higher low pivot (thick gray line) becomes
the trailing stop. Lather, Rinse and Repeat....gg
Using this method would have just about kept you in for most
of the up move for the first leg up for NTAP. Personally, I
normally trade more aggressively and traded some of the
intraday wiggles, I also began to anticipate a break to the
norm of the rising wedge and begin to trade NTAP with a short
bias. You might note that the low on 10/29 came in just about
at the 61.8% retrace level of the rising wedge. Although the
15-min model bottomed the longer-term models still suggested
more down was/is to come.
The intra-day bullish pennant chart formations on Friday
suggested breaks up and out were about to occur. This forced
me to cover and go long into the close. I have found rising
wedge patterns formed from an up trend more often than not do
not result in a complete retrace of the pattern or a reversal
of trend. At Monday’s open, I am sure my models are going to
be biased towards over bought and will be looking to close
long positions Monday/Tuesday and once again go short to
advantage what I am expecting to be a pullback to offset the
overbought condition.
My Qchart “Intraday” NTAP (Network Appliance) 15-min Semi-log Chart
Posted by: LG
In reply to: augieboo who wrote msg# 2053 Date:11/2/2002 8:40:02 AM
Post #of 2067
augieboo: I started answering your question and realized that
I’ve been doing what I do for so long a lot of stuff that just
seems intuitive for me begins to seem quite complicated when I
try to put it down in writing. I’ve decided the only way I can
answer this question without writing a small book (and I am not
inclined to write a small book) is to greatly condense my
reply. First of all, I don't say to my self, what is the risk
to reward ratio before I make a trade, I tend to do it now on a
more intuitive basis.
The first step is to determine at a minimum what you expect to
gain at a minimum. True, I don’t subscribe to measured moves
with respect to price/volume chart patterns. Although I do know
those measurements seem to work at times, just not enough for
me to place bets on them, IMO.
To determine buy and sell entries I rely a variety of inputs.
I’ve already shared one of my primary methods, using multiple
time frame analysis of a set of indicators coupled with various
methods to determine where possible support or resistance is
going to come into play. I’ve found buying (or selling short)
equities just before, right at or shortly after an equity makes
a reversal in tandum with a market pivot, be it intra-day or
longer provides an entry that often can quickly produce a
profit. This profit pad can be booked depending on how much of
a move I am expecting or it can be used to provide at the least
a break-even stop and in many cases a stop loss that is in the
money.
To determine how far I expect a stock to run or drop, I analyze
using various sources of input. Primary is technical analysis
using ob/os indicators, momentum indicators, support/resistance
targets. Secondary is some fundamental (only in reference to
how it will effect sentiment) and sentiment analysis. To break
the method down would require more writing and time than I am
inclined to spend now.
Once I’ve determined I am going to trade a particular equity,
which means I’ve determined it is ripe for a reversal or for a
continuance break, some of the ways I determine how far I
expect an equity to move is by the ob/os condition at my entry,
the prevailing trend, chart patterns and SRLs and trend lines.
Of course, I always prefer to time trades with the market in
unison, but this is not always done.
As a rule of thumb I do not make percentage evaluations with
regards to stop loss points. I usually evaluate the expected
minimum gain and make an assessment as to how much I am willing
to risk based on several factors I’ll outline later.
For a buck, I may be willing to risk a quarter. For two bucks
or more I may be willing to risk fifty cents. And on the rare
occasions I decide the position is worth averaging in, I may
risk more, but rarely more than a buck. I don’t recommend an
average into a position approach, but as I said on rare
occasion I do use it. Once a position provides enough profit, I
first move my stop to a break even point. The next move of the
stop is motivated by additional profit and an indication the
stock is beginning to move in the desired direction. Once this
occurs, I begin to trail the stop behind the move. I do this in
one of two ways. One of my methods is by moving the stop in a
stair step pattern by identifying intra-day support/resistance
pivot points trailing the price action. I use these trailing
pivot points as stop loss steps. My second methods is to set a
dollar amount trail. When I use this method I usually start out
with a deeper or more relaxed trail and tighten it up as I near
my profit target and or as the price action nears SRL depending
on my os/ob indicators.
A poor risk to reward stop would be if you were expecting to
make at a minimum a buck on a trade and you risk fifty cents or
more. If you are finding you need to risk at those ratios you
need to improve on your timing. Whenever you realize you’ve
made a bad entry, always allow your stop to take you out or
just back out of the trade early. The sooner you can learn to
determine you were wrong the less money you are going to lose.
Keep in mind, now days commissions are just to cheap to not
bail when a trade goes south. If you find you are bailing to
often, you need to pull back from trading and analyze what you
are doing wrong. Paper trade any changes to your methods if
need be.
No one can read every stock. If I am trading a stock and I get
it wrong three times, I move on to another equity. You can’t
read them all and even the ones you are reading well are only
on a honeymoon with you and honeymoons always end.
Beyond just getting the entry timing right, I think risk is
determined by a variety of other factors. Such as…
1 – The liquidity of the issue
2 - The volatility of the issue
3 – Confidence in one's read of the trade
a – Confidence in overall market direction
b – Confidence in the direction of the equity
4-Whether the trade is going to be:
a -a trade with the prevailing trend of the equity and market
b -a trade with the equity but against the market trend
c -a trade against the trend of the equity and against the trend of the market
d -a reversal of trend play for the equity without a market reversal
e -a reversal of trend play for the equity in tandem with a reversal of the market
5 – How many positions do I have in play at one time and how large is the position to be?
1st – I always set a price stop based on how many shares I have
in the trade, which determines upfront the maximum amount I am
going to risk. (Rare exception: I do on occasion make the
decision to average in, but this is rare and I do not recommend
it unless one is very confident. Even when I do average in, I
set an ultimate stop, once that is tagged I am out.)
2nd – I look for a pivot point or a support/resistance level at
which to set a stop just beyond or in front, depending on the
price action of the equity at the time of the trade. (Are other
traders tending to lag at SRLs or jump in early with this
equity.) This stop loss point must be with in the limits of the
1st. (Only exception being the rare exception mentioned above.)
After stops are set, I am always re-evaluating as the market
continiously provides additional input. However, unless I
decide to average in, I almost never lower my stops (or raise
in the case of a short sell) once set.
Regards,
LG
------------------------------------------------------------
Posted by: LG
In reply to: LG who wrote msg# 2065 Date: 11/2/2002 10:36:06 AM
Post #
Here is an example of my Intra-day Pivot Point (Trailing Stair
Step Stop Loss) Method...
I posted in advance that I expected NTAP to rise to 10 and
possible as high as 16. I began to buy at 5.95 and below. My
averaged position was 5.50. We shall see how this rally goes
for the 16, but the TEN is IN THE BAG.
Assume we made a fair timing entry on NTAP a little above the
10/8 low (and we did..gg). I then wait for the first move up
and subsequent jog down to establish a higher low. The thin
horizontal gray line (higher high) is used to put into to play
the higher low pivot point (thick gray line) to be used as the
next stop. Once the price action moves above the pivot high
(not just a penetration) from which the pivot lows was
established, that higher low pivot (thick gray line) becomes
the trailing stop. Lather, Rinse and Repeat....gg
Using this method would have just about kept you in for most
of the up move for the first leg up for NTAP. Personally, I
normally trade more aggressively and traded some of the
intraday wiggles, I also began to anticipate a break to the
norm of the rising wedge and begin to trade NTAP with a short
bias. You might note that the low on 10/29 came in just about
at the 61.8% retrace level of the rising wedge. Although the
15-min model bottomed the longer-term models still suggested
more down was/is to come.
The intra-day bullish pennant chart formations on Friday
suggested breaks up and out were about to occur. This forced
me to cover and go long into the close. I have found rising
wedge patterns formed from an up trend more often than not do
not result in a complete retrace of the pattern or a reversal
of trend. At Monday’s open, I am sure my models are going to
be biased towards over bought and will be looking to close
long positions Monday/Tuesday and once again go short to
advantage what I am expecting to be a pullback to offset the
overbought condition.
My Qchart “Intraday” NTAP (Network Appliance) 15-min Semi-log Chart
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