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Strategies & Market Trends : The Dead Cat Bounce Theory
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To: SE who wrote (212)3/25/1997 9:44:00 PM
From: Kiriakos Georgiou   of 1836
 
OK, assume 55% of the time this method would work and give you $200 in a day, and 45% of the time it wouldn't work and you would lose $200 in a day. The year has 250 trading days, so your profit would be

137*200 = 27400

and your loss 113*200 = 22600

for a net profit of 27400 - 22600 = 4800 which would be at most 4000 after taxes, possibly even 3500 depending on your tax rate. Your comissions would be 20 * 250 = 5000 so you would be in the hole.

Putting a higher stop would decrease the % of the time the method would work because of the normal trading variance (4% on nasdaq).

That's IF it works 55% of the time, which it doesn't.

So much for the $5K argument, but what if you played with $50K? Still wouldn't work. a stop can't guarantee you exit from a stock especially when everybody is selling and you have lots of shares to sell. The larger amount of $ you play the less comissions as a % you pay, but getting in and out is not as easy... you start being the market yourself. Get involved in a few -10% and you are history.

Kiriakos
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