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Greetings, Pro-fundity team members -
03-21-03

At the bottom of the Guidepost, a full listing of this weeks picks are shown, in addition to the Charts via the Pick-link.

As a benefit of membership, you have access to all Guideposts (including Archived GP's) and Picks. If you miss a week or two for whatever reason, you will be able to go into the Historical Guidepost link to catch up with both the weekly guidepost and the 30 picks made for the week.

Greetings, fellow Pro-fundity team members

1. We all face risk every day of our lives, driving to work, flying across the states, drinking the water provided by our cities, investing in the market… In some cases the risk is so high we avoid the experience. We all have our own level of risk tolerance, the point where we do avoid the experience. But our tolerance for risk shifts as the benefit of taking the risk changes. How many people would buy lottery tickets for a buck each if the reward for winning were 10 bucks? Not many, I suppose. So our risk tolerance depends on the level of reward. In the market, we use these two factors together, risk and reward, as a ratio, with the reward in the top, divided by the risk in the bottom: Reward/Risk Ratio = Potential Reward/Potential Risk.

2. It behooves all traders to consider the RR ratio before investing any money into a trade. Lets consider this ratio and how it is used in this Guidepost. Experienced traders have some level of comfort they require before committing themselves to a trade. A popular RR ratio is 2, that is, the Reward is twice as high as the risk. Others use an RR ratio as high as 3 or even 4. This is one of the factors in a trading scheme you must come to grips with yourself, finding what works for you, something that becomes a default factor as you plan your trades. Consider the following examples used with our weekly picks.

3. The following chart was a pick made on 2/28/03 as a potential trade. Before we commit, we always look at the RR ratio, as shown in the table below the chart.

   
   

   

   Fig. 1

   
   

   Fig. 2

4. Look at line 8 on this table. This is one of our PTS spreadsheets used to plan and follow trades. The first cell lists the Ticker (EYE) with the date of the pick and the closing price on that day. The question: Is this pick on this day ready for a buy? The next cell, Estimated Target Sell, requires our judgment. We can’t get the computer to do this for us. Look at the chart above carefully and ask yourself, how high is the price likely to go? We use previous benchmarks to make this decision. There are two possibilities in this example, shown by the dashed and dotted lines. Taking a more conservative position, we selected $9.40 and placed this value in our spread sheet. The difference between this value and the entry value on the pick date ($9.40 - $8.25 = $1.15) is our Reward, and this goes into the top of our ratio.

5. What I haven’t shown on this spreadsheet is the loss-cut point, which in this case is $7.65, or $0.60 less than the buy price (if we decide do buy…). Now, that difference, $0.60, represents the Risk, or what we could lose if sold at the pre-determined loss-cut. Our RR ratio is then 1.15/.6 = 1.92. Choosing 2.0 as our RR default, this doesn’t make the cut. No buy! But its close. The next cell in our table on line 8 is the price level required to meet the target RR ratio. Notice that it is only a few cents lower. So, we watch for a few days and if the price drops below $8.23, and if the price pattern still looks promising, we will buy. That’s what happened as shown on 03/03/03 when we bought at $8.03. The next chart shows the price pattern to today’s date, 03/19/03.

   
   

   

   Fig. 3

6. Try one more example MVL, picked on the same date, also shown in the PTS spreadsheet, as shown below:

   
   

   

   Fig. 4

7. In this case, when the price has been trending up while rolling, it is not easy to select benchmarks for a target sell. I picked a start point about the first of the year at $9.40 up to a level toward the end of January at $11.00. That was an increase of $1.60. IF I choose that as my potential increase, with a buy point at $11.18, my target sell is about $12.70. With a loss-cut at $10.56, my RR ratio is a healthy 2.45. RR satisfied! The following chart shows where we are today (03/19/03).

   
   

   

   Fig. 5

8. This Guidepost is an introduction to using Reward/Risk ratio as an important element in entering positions in the market. A couple of important points: First, choosing an RR ratio did not make the price do anything. It merely serves to control risk in taking market positions. Secondly, the level of RR ratio is quite subjective in selecting target sell levels and loss cut values. The important key here is to find an RR level you are comfortable with and then stick to it. This element of risk control will reduce the emotion involved in your trades. By reducing emotion, with a strategy that fits your own personality, you automatically reduce the risk.

9. Point: We didn’t discuss how to choose the loss-cut level. That deals more with exits which will be covered in future Guideposts. We need to spend more time on entries, since this is the more difficult part of trading. Exits can be largely automatic, based on predetermined loss-cuts, sell-limits, or technical strategies. But entries, laying the money down, can be very emotional. And emotion is our biggest hurdle. Remember, computers don’t buy stocks, people do, with all our weaknesses and hang-ups. Let's use all the help we can find to make this task more profitable.
   03-21-03 Pick Selection:

   Main Picks:
   ARNA,FLWS,GNTA,IUSA,NVLS,RCL,SGMS,SNS,TREE,URS
   Breakouts:
   CKFR,CLI,ENTG,HAS,IART,MATK,NFI,NWAC,PRGS,SCLN
   QuickPicks:
   BCE,FCH,GCO,IT,RDEN,SEAC,SRNA,TUP,TY,UNM

   For detail and followup on Pro-fundity Tradescape,
   find the link on "Advanced Trading Tools" on the home page.

   Be diligent
   Take Action!

   

   
   
   
   
   

   
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