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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: EepOpp who wrote (1943)	7/18/1999 7:04:00 AM
From: TheKelster	Read Replies (3) \| Respond to of 18137

Probabilities and Odds. (see stock picking thread, look for IFLO). Tai, Your technical work is very clear. Your points are dead on. You have shown us several formations that point directly to a breakout. I appreciate your contributions to this thread. As ID points out there is no denying a strong favorable trend has been in place for some time. This stock presents us a textbook dilemma. I know when I first began to read the books and learn the trade everything seemed to swim together. Advice seemed in direct conflict with itself. Example: "You can never go broke taking a profit - Let your profits run" So which is it? How about this "Buy low sell high - Buy high sell higher" Ahhh yeh right..is that buy high or sell high or get high? I think one of you dudes rolled that smoke with my last $100.00 The charts used to confuse me to no end. The Daily was up, 60M flat, 15M down, 5M rebounding, 1M pulling back. I could not see the picture. I could not tell you if a stock was coming or going to save my life, not to mention saving my capital. "The trend is your friend". HUH! Trend? What trend? Man it must be the acid, I've only got one stock but I think I see six different trends. I hope one of them holds still long enough for me to get in. :-) Begin with this, Every point Tia makes is correct. I know for a fact, IFLO CAN BREAKOUT AND CONTINUE UP. Now draw a Trader Vic trendline from the bottom in Dec98 through the bottom in April99 and extend it upwards through the current price range. What does it add to the picture?? Now go to your indicators and turn on the MACD. Hmmmm. Turn off the MACD and turn on the OBV. On Balance Volume has declined from 4 million at the end of May to about 2 million today. Read the whole explanation for OBV but notice this line "Therefore, if OBV is going down over time while price is increasing, a price collapse is possible." Notice OBV trended up from DEC98 until May99. Look at the RSI Index. Draw a trendline from the peak in March99 to today. It's declining. Turn on BB's. HMMM Read Trader Alan's dissertation on BB's. HMMMM "...falling price within the upper band signals divergence...with the current trend" and "Reversal off any band increases ODDS (my caps) that the price will expand in the reversed direction..." NOW I AM CONFUSED. Truth of the matter is we have no crystal ball. I am wrong on a daily basis. Yet, we must somehow clear the fog or we can never make a pick let alone make any money. NOW WHAT??? Probabilities and Odds: In order to win in this game you must find a stock of interest. Make an initial assessment of the current trend and decide if the trend has the ability to move in your direction of choice. Then you must determine the appropriate entry and exit points. The determination of entry and exit points will make or break you. "Timing is everything, Perfection is unattainable" (TIN CUP). Without timing you can make a bad entry into a good stock and get whipped out for a loss. You can make a bad entry into a bad stock and get taken to the cleaners. Soooo-how do I do this?? Lets say you have decided that IFLO is the stock for you. It is going to break out and it is going to go to 5 1/4. Very good you are on your way to becoming a successful trader. You have done the first very important step. You have selected a stock. Now, is this the right time?? Where do I get in? Where do I get out and how do I protect my capital in the highly unlikely event that I "Trader the Great" have (heh heh :-O) made a mistake? Whether IFLO goes up or down what entry would make this a "good trade"? Look at the range. Isn't 3.50 the former resistance and the current support? Tia is right on the money 5.25 looks like an excellent target. Probability as explained in "Against The Gods" (see my personal file) is the ratio of favorable outcomes to the total opportunity set. Odds as explained is the ratio of favorable outcomes to unfavorable outcomes. (Read that again and see the difference.) If we buy IFLO @4.00 and use 16ths for ease of computation we derive the following: Probabilities: From 4 to 5.25 we have 20 steps(or 16ths) (these would be favorable). From 4 to 3 7/16ths (assuming a mental stop 1/16 below support) we have 9 steps (unfavorable of course). We have (20+9)a set of total outcomes of 29(ignoring the price staying the same). 20 favorable over 29 total gives us 20/29=68.9%. The probability that this trade will end favorably (read profitably) is 68.9%. That sounds good, doesn't it? Sorry dude, there goes the rent money. Odds: 20 steps favorable over 9 steps unfavorable gives us 20/9=2.22. The Odds that we will make a profit are approximate 2 to 1. If you consistently play odds this low you will go broke. (And you thought lottery tickets were a sure thing) So what to do? Look again. Wouldn't you feel safer if you had bought at the bottom of the current range. I know I would. It just looks better. This time your eyes are not deceiving you. Lets look at the numbers for IFLO if we set our buy point no higher than 3 11/16. Probabilities: Still using a target of 5.25 and a protective stop of 3 7/16 there are now 25 favorable steps in the same set of 29 total steps (again ignoring no movement). Thus 25/29=86.2% probability of making a profit with this trade. Ahhh, now that's my kinda number. Odds: Lets see, wouldn't that be 25 favorable steps over 4 unfavorable steps. 25/4 = 6.2 "Alrighty then", the odds are slightly better than 6 to 1 that I will be profitable!! Cummm on … baby needs a new pair of shoes. :-D When you have conflicting information, if you still think you want to go ahead with a trade, you need to stack the deck in your favor. Do this by clearly defining the entry, exit, and protection points. Once clearly defined - Make the trade IF AND ONLY IF the odds are better that 5 to 1 (my personal number). This will allow you to survive the early trading experience by making your wins much bigger and keeping your losses small. It does no good to have the discipline to get out at your stop point if getting out at your stop point guarantees consistent sizable losses and your profit exits only give you moderate wins. Premium hands dude. KK