If you like this e-zine, please do a friend
and me a big favor and "pay it forward."
If a friend DID forward this to you and if
you like what you read, please subscribe by
Apr 30, 2007 - Issue #056
Risk vs Reward
Dow score card for the week ending 4/27/07.
DJ-30: 13120.94 +158.96 +1.23%. In the Real World: 53.82 +0.65 +1.23%.
UP: 18, Down: 12.
Trends (weekly): This is the subjective part.
Rising 19 (+1) 63%:
+*AA, +*AIG, AXP, BA, CAT, DD, DIS, +*GE, HON, HPQ, IBM, JPM, KO, +*MMM, MO, MRK, MSFT, T,
Consolidating 10 (-1) 33%:
C, -*GM, -*HD, INTC, -*MCD, PFE, PG, UTX, VZ, WMT.
Declining 1 (n/c) 3%:
+/- denotes change of direction.
* denotes change of category.
Risk vs Reward
We still don't know what this market has in store for us. It is moving up, but
Even if the trend remains up, how much further up? Is it worth the risk?
Some individual stocks have exploded to the upside. Is that the final "mark-up"? Some
stocks have tumbled, usually due to earnings disappointments. Should they be bought
on declines or shorted on rallies?
As far as the general market is concerned, are we nearer the top than the bottom? After
all, this major uptrend has lasted since 2000.
These questions, and more, are faced by all market participants every day. How to cope?
Pondering whether to lighten up on existing positions or initiating new positions traders/
investors are faced with the problem of risk vs reward.
Money management is responsible for 65% of the results of any game you play. If your
average gain is three times your average loss, this means you can be wrong two times out
of three and still make money (do the math).
When evaluating a market candidate (long or short), first determine the maximum loss
you're willing to risk. Then estimate if the profit potential is at least three times the
amount of that risk. If you can't see yourself making at least that much, pass.
If there are options trading, compare each option's potential to the underlying market
to see if you can gain leverage (more bang for the buck).
If there are single stock futures available, compare these as substitutes for the
underlying. Examine all possibilities to maximize leverage while limiting risk.
No trader/investor can do more.
Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!