Reward for Risk Charting Feature
Stockscores.com Perspectives for the week ending November 17, 2014
In this week's issue:
In This Week's Issue:
- Stockscores Canadian Tour - Final Week
- Stockscores' Market Minutes Video - Mean Reversion
- Stockscores Trader Training - Reward for Risk
- Stock Features of the Week - Long Term Turnaround
Stockscores Canadian Tour
For these upcoming presentations, I plan to walk through the processes I use to find longer term position trades, medium term swing trades and short term day trades. But first, I will highlight the one simple thing that starts almost all market beating trends. Capital preservation should be the number one goal of all traders so I will show how I manage risk. Finally, I will show our new Stockscores Education Center and how you use it to become a better trader. Hope to see at one of these upcoming events:
Calgary - Nov 17 and 18
Vancouver - Nov 19
Surrey - Nov 20
Webinar - Nov 25
For details and to register for one of these free events, Click Here.
Stockscores Market Minutes Video - Mean Reversion
Algorithmic trading often takes stocks back to their trend line using a strategy called Mean Reversion. Understanding this can help you to avoid whip saws in your trading. That plus this week's market analysis.
Click here to watch
Trader Training - Reward for Risk
Traders acknowledge their profitable trades in terms of money made or percentage gain earned. It is far less common to measure the success of a trade by the reward earned for the risk taken. Yet, this is a far better measure of success because it recognizes that not all trades end profitably and it is important to consistently have trades with profits that are greater than the typical loss.
Consider two different traders. The first is profitable on 90% of his trades, making an average of $500 on each. The second is right 70% of the time and also makes an average of $500 on each trade. Most would say that the first trader is better.
But what about the inevitable losses? What if the first trader loses $5000 on the 10% of trades when he is wrong while the second trader limits losses to only $100 on her losing trades, which happen 30% of the time?
We know that the first trader actually loses money over time despite being right 90% of the time. The second trader makes a good profit over a large number of trades because the average profit is five times larger than the average loss.
The risk of the trade is the difference between your entry price and where you plan on taking a loss if the market proves you wrong. Limiting your losses with a price level where you intend to stop the size of the loss is a must for any trading strategy.
The reward of the trade is the difference between your exit and entry prices, assuming you exit at a profit.
So, if you buy a stock at $5 with a stop loss at $4.50 and then exit that trade at $7.50, you have earned a reward for risk of 5 to 1. The risk is $0.50 a share, the reward is $2.50.
Advanced and Pro Members of Stockscores can use the Risk Calculator tool to calculate their Reward for Risk ratio. Free users of Stockscores.com can plot the reward for risk lines on their charts. To do so, first open a chart by entering the symbol in the upper right hand corner of the site.
Next, go in to the Charting tab and enter the entry and stop loss prices in the boxes at the bottom of this tab below Risk/Reward. Click on create chart and the lines will appear.
It is important for all traders, short or long term, to track the Reward for Risk ratios on all of their trades. This metric, combined with success rate, provides a true picture of trading success.
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The correction of the correction has run its course, markets are back on the trajectory that there were on before the October sell off. Large cap, stable stocks continue to attract capital but the small caps are slowly repairing their broken charts and could be a source of opportunity soon. Watch for the IWM to break out of its sideways trading range as a sign that the lower priced stocks are worth watching again.
Canadian markets are lagging but it is really a tale of two markets, the commodity stocks and everything else. With a strong US Dollar and weak commodity prices, the Energy and Mining sectors are suffering and dragging down the overall TSX 60. Take those sectors out of the index and the TSX would have a chart similar to the SPY.
Here is a stock that made a good move last week and looks like it has more room to run. It was a feature in my daily newsletter but with a strong weekly chart, I felt it was worth mentioning here as well.
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1. TGTX
TGTX broke from an ascending triangle pattern last week and is enjoying a steady increase in volume. Good position trade candidate with support at $10.60.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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