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Strategies & Market Trends : Strong Industry Groups - Strong Stocks
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To: Sam Raven who started this subject3/31/2002 12:15:18 AM
From: Sam Raven  Read Replies (4) of 1567
 
I got several e-mails on stops and risk/reward, so I put an example analysis
of Monday's watchlist here so everyone can look at how it should be evaluated.
Using 5 picks and assuming you buy all 5 stocks and do the calculations from
the highest buy price within the range to either the stop (risk) or target (reward).

Symbol Buy Range Stop Target Risk Pts. Reward Pts.
ABF 16.81-17.49 16.64 20.35 0.85 2.86
ALLY 28.00-30.00 27.74 33.54 2.26 3.54
BRO 30.46-31.10 30.14 34.98 0.96 3.88
FRNT 17.38-18.15 17.21 23 0.96 4.85
GFF 16.10-16.75 15.94 19.06 0.81 2.31

As an average of all 5 positions this gives a 1.17 point loss vs 3.49 reward.
But, assuming only a 40% success rate, meaning 2 stocks hit their target and 3 hit stops,
and picking the 3 biggest losers as stops, you net 1 point total, worse case.
(Gain from ABF, and GFF minus loss from ALLY, BRO and FRNT)

A 60% success rate (3 stocks hit their target and 2 stop out)results in
(depending on which stock does what), a 4+ point gain (worse case).
That would be moving GFF from the loss to the reward column so you'd add $2.31
to the gain and subtract 81 cents from the loss side.

Now, if you bought 100 shares of each at the highest price within the buy range
your total cost would be $11,349. If every position stops out, your loss is $584.00
or 5.1% of the total invested. The worse case (largest point stops) at a 40% success rate
gives a gain of approximately $100.00 or 0.88% gain. The worse case 60% success rate
gives a gain of approximately $400.00 or 3.5% gain. Averaging the 60% scenario's
for a target expectation is a $500.00 gain or 4.4%.

Since these are short term trades, it could be 2 weeks (or more) for all the
positions to complete (either hit the target or stop).

Now the die is cast and we can see how it plays out in the real world.....

Good Trading!!

Sam
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