Dell (DELL) is advancing, after an SEC filing disclosed late Friday indicated that the company’s founder, Michael Dell, recently bought nearly 10.5M shares of the company for prices ranging between $14.21 per share-$14.42 per share. The transactions were carried out between March 16 and March 18. In mid-morning trading, Dell gained 34c, or 2.35%, to $14.85.
Midway Gold Jumps More Than 5% After Hiring CFO
Shares of Midway Gold (MDW) are higher after it said it hired Fritz K. Schaudies as its Chief Financial Officer replacing Doris Meyer. Midway Gold shares are up 5.23%, or $0.09, to $1.81. Shares have topped out in the session at $1.83 but are well under the 52-week high of $2.39.
Risk Reward Ratios | What do they mean and how do you use them?
A trader should see the forex market as a business. There are 2 main goals when it comes to running a business: 1 – Not to lose money & 2 – To make money. The same can be said for trading forex. A trader’s first priority is not losing money (preserving capital); the trader’s second priority is making money (building on their capital).
Every trade carries an element of risk. Good traders know that managing risk is their most important concern; however many novice traders go down the other road and become more concerned with their potential rewards giving little regard to their risk.
When successful traders identify potential trade set ups the first thing they do is calculate their risk, they work out the safest place to put their stop loss. They know the market never moves in a straight line and always give their trades space to breathe. The next thing they do is work out their potential reward. They don’t randomly place or go for unrealistic targets. They analyze the current market and decide upon what area they will be targeting. If they feel there is no realistic target available they will NOT take the trade. Their target will always be a minimum 2x the size of their risk. (i.e. if they risk $50, their target will be a minimum of $100).
The Ratio –
A Risk Reward ratio is the ratio between a trade’s risk and a trade’s reward. Commonly, the ratios are written in the follow way – 1:3, this means the reward is 3x the size of the risk. The first part of the ratio will always be 1, with the second part usually being 2 or more.
1:3
Risk : Reward
Risk : Reward can be measured in a number of ways. Each part of the ratio can either be: a number of pips, amount in money or as a percentage.
For example:
If we are taking a trade with a stop loss of 50 pips targeting 150pips, our R:R ratio is 1:3.
If we are taking a trade with a stop loss of $50, targeting $150, our R:R ratio is 1:3.
If we are taking a trade risking 2% of our account, aiming to grow our account by 6%, our R:R ratio is 1:3.
The reward part of the ratio can be whatever the trader decides, as minimum most professional traders will be targeting at least 2x what they risk, usually a lot more. It is not uncommon for longer term trades to have a R : R of 1 : 5 / 6 / 7 etc…
Using a good Ratio has a number of benefits. The first and probably most important being R:R ratios help eliminate emotional trading. The second being they allow you to reduce your ‘win rate’ and still be profitable in the long run.
Below you can see the difference and benefits of using a higher R:R ratio compared to a low R:R ratio. Each scenario is based on the risk amounting to $100, 10 trades being taken with 5 winners and 5 losers.
| R:R 1:3
| |
| Trade | Loss | Win |
| 1 | 300 | |
| 2 | 100 | |
| 3 | 100 | |
| 4 | 300 | |
| 5 | 300 | |
| 6 | 100 | |
| 7 | 300 | |
| 8 | 100 | |
| 9 | 100 | |
| 10 | 300 | |
| Total | 500 | 1500 |
| Total Profit | 1000 | |
You can see above using a 1:3 Risk : Reward ratio obviously works out very well. We only need to win 50% of our trades to bring home a handsome profit. Every losing trade is worth $100; every winning trade is worth $300. It’s clear to see 1 winner greatly outweighs 1 loser meaning we can afford to lose 5 trades and only need to win 2 to make a profit.
| R:R 1:2
| ||
| Trade | Loss | Win |
| 1 | 100 | |
| 2 | 200 | |
| 3 | 200 | |
| 4 | 100 | |
| 5 | 100 | |
| 6 | 100 | |
| 7 | 200 | |
| 8 | 100 | |
| 9 | 200 | |
| 10 | 200 | |
| Total | 500 | 1000 |
| Total Profit | 500 |
You can see above using a 1:2 Risk : Reward ratio again works out well, however not as well as the 1:3 mentioned above. This time, we are targeting 2x what we have risked. Every losing trade is worth $100; ever winning trade is worth $300. its clear to see 1 winner greatly outweighs 1 loser meaning we can afford to lose 5 trades and only need to win 3 to make a profit.
| R:R 1:1
| ||
| Trade | Loss | Win |
| 1 | 100 | |
| 2 | 100 | |
| 3 | 100 | |
| 4 | 100 | |
| 5 | 100 | |
| 6 | 100 | |
| 7 | 100 | |
| 8 | 100 | |
| 9 | 100 | |
| 10 | 100 | |
| 500 | 500 | |
| Total Profit | 0 | |
Using the 1:1 Risk : Reward ratio does not work out as well as using a 1:2 or 1:3 as mentioned above. This time we are targeting the same as what we are risking meaning ever loss will be felt the same as every win. In this case our percentage of winning trades needs to be higher if we want to make a profit. If we lose 5 trades we need to win 6 trades to make a profit.
| R:R 1:0.5
| ||
| Trade | Loss | Win |
| 1 | 100 | |
| 2 | 50 | |
| 3 | 100 | |
| 4 | 100 | |
| 5 | 50 | |
| 6 | 50 | |
| 7 | 50 | |
| 8 | 100 | |
| 9 | 100 | |
| 10 | 50 | |
| Total | 500 | 250 |
| Total Profit | -250 | |
The R : R of 1:0.5 does not work well after our 10 trades. This time our target is half of what we are risking. Ever losing trade is worth $100 with ever winning trade being worth $50. Its clear to see we that if we lose 1 trade we need to win 2 just to get back to breakeven. We would need to win 3 trades in order to turn a profit meaning our percentage of winning trades needs to be very high which can be difficult to achieve.
Using good R : R ratios are of paramount importance when trading forex. A high ratio allows the trader ‘breathing space’ with their win rate, we can win fewer trades and still make a handsome profit. Low R:R ratios mean the trader needs to have a high success rate of winning trades which we know is very difficult to achieve (despite people claiming 90%+). Its important to remember every trade carries an element of risk and as a trader you are a Risk Manager. Your first and most important job as a trader is to MANAGE YOUR RISK.
The Options Markets Tell Secrets… Should We Be Listening?
By Jared Levy, Editor, Smart Investing Daily, taipanpublishinggroup.com
When I first began trading professionally in the options markets about 16 years ago, I thought I knew it all. I understood all the theory and mathematics that went into finding the price of an option, how the exchange system worked (or was supposed to work), etc. You see, as a young trader on the floor I had to at least act as such, or I was bound to be prey for the traders who had spent a quarter-century there before me.
The truth is, I didn’t really have the wisdom that many of the best options traders in the world have. Anyone can have a “good trade;” in fact some have a string of trades that may even propel them into wealth to some extent. But I have learned that to have longevity, aside from some luck, it takes not only skill, but the ability to look a little deeper into yourself and the markets. Today I’ll focus on the latter.
More to the Numbers
I have spent most of the week in Nicaragua (which is a remarkable, beautiful country, by the way) with some of our clients. None of them are option traders, but all of them have similar basic reasons and methods for getting into a stock or any investment, and most have been successful at doing so. But after several conversations, I hopefully convinced them to learn more about options, but more importantly to mitigate the profit-and-loss volatility of their investment portfolios, which seems to be a popular theme amongst all investors.
When most of us look at a stock, or any investment for that matter, we look at its cost, fundamental data and maybe some technical formations, and after some research make a decision to buy or sell. This method is common and has made many successful. But as my good friend Mark Douglas says, there is a huge “profit gap.” A profit gap is the potential you can make in your investing and what you actually end up making.
What many of us fail to look at is the “volatility” of that investment. In other words, we forget to ask what the typical percentage gain or loss over a year’s time may be.
I know math scares the “you know what” out of most people, but it doesn’t have to be that hard. Understanding how volatile an investment is not only can save you the cost of “Pepto-Bismol,” it can save you real cash, help you set realistic profit targets and stop-losses, and shrink your profit gap!
(By the way, options trading and other investment strategies don’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market with our easy-to understand articles.)
What Is the Volatility of a Stock?
To make this explanation straightforward, I will keep this simple.
There are two types of stock volatility:
- Historical (also called observed volatility) — is a measurement of how much a stock or investment fluctuates in price over a certain period of time.
- Implied Volatility (aka “IV;” figured from option prices) — tells us how much of a fluctuation the options are anticipating in the future based on their price.
Both types are expressed in annual percentage terms. So if I said that the observed volatility of IBM is 20%, this means that IBM is moving both up and down at about a 20% annual rate over the past year (or other duration).
*This would also mean that the annual standard deviation for IBM is $20, for all you math geeks.
You can simply observe the movements over a period of time to figure this out. You don’t have to do the math yourself; most brokers actually have this data available in a chart or otherwise. Ask them!
This measurement helps professional traders and you to set realistic expectations for stop-losses and profit targets.
- Assume you bought IBM at $100 and its observed volatility is 20% — what do you think the chances of it getting to $140 in a year’s time are? Probably slim!
- What if you bought IBM for a long-term trade (over a year) and you placed a stop-loss at $95 — what do you think the chances of getting stopped out prematurely are? Probably high!
Can you see how it helps to look at the volatility of a stock before you set targets and stops?
This is only a taste of how historical volatility can be used; if you want to learn more, there are many great educational sources out there. I also covered this in depth in my recent book, Your Options Handbook.
What Options Tell Us
At this point, some or all of you may be about to close the Web page and move on, but I implore you to read further and pay attention to this!
You see, the “smart money” as it’s called uses options to hedge their bets (on stocks) and also to make predictions about a stock’s future movement, especially over earnings or news releases. When they are buying or selling options, they are moving implied volatility up or down!
Looking at an option’s implied volatility can tell you much about what the “smart money” is thinking. Let me be the first to tell you that they are not always right, but they tend to have much more skin in the game and have huge budgets for research (and friends). They make it their business to be right more than they are wrong.
Just about every options broker out there displays an option’s implied volatility in the “option chain.”
Let’s look at real S&P 500 volatility and options this time.
Looking at the chart below, price is on top, volatility is on the bottom (blue is observed, orange is implied). When there not only is a spike in implied volatility, but it starts to gap way above historical, I start to wonder what is going on. Back in January, we saw this gap widen and the market seemed unstoppable, but the option markets saw differently; sure enough, we had some small corrections. The gap got wide in mid-February and again about a week ago, which is why I wrote in my article from last Friday that I thought the market could see more selling.
Right now, implied volatility still remains elevated; options markets are predicting movement of about 1.4% per day in the S&P 500 about two out of every three days for the next couple of months.
If this article has got you thinking, this is only the tip of the iceberg. Learn the option markets and what they can tell you. I’m not saying they are a crystal ball — they’re more like a canary.
Editor’s Note: It Can Happen in Just 72 Hours… There’s an event that could rattle the very foundations of America unlike any other… and it has very little to do with the value of the dollar. Get all the details in this exclusive investment report.
About the Author
Jared Levy is Editor of WaveStrength Options Weekly, our options trading research service and Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.
Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange’s youngest-ever members to become a market maker on three major U.S. exchanges.
He has been featured in several industry publications and won an Emmy for his daily video “Trader Cast.” Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.
Blanchflower Says G-7 Yen Action Key for Global Economy
March 21 (Bloomberg) — David “Danny” Blanchflower, an economics professor at Dartmouth College and a former Bank of England policy maker, says the currency intervention by Group of Seven nations on the Japanese yen was “the right thing to do.” Blanchflower, speaking with Deirdre Bolton on Bloomberg Television’s “InsideTrack,” also discusses Federal Reserve monetary policy and the U.S. economy. (Source: Bloomberg)
Treasury to Sell MBS Holdings Up to $10 Billion a Month
March 21 (Bloomberg) — The U.S. Treasury Department plans to wind down its $142 billion portfolio of agency-guaranteed mortgage-backed securities by selling about $10 billion in holdings per month. The sales will start this month and be subject to market conditions, the department said today in a statement. Bloomberg’s Lizzie O’Leary reports. (Source: Bloomberg)
Google Says China Blocking Email Service
Google (GOOG) says the Chinese government is interfering with its email services in China, making it difficult for users to gain access to its Gmail program amid an intensified Internet crackdown following widespread unrest in the Middle East, the AP and other news outlets report. GOOG is trading up 0.7% in its first pre-market matches, at 564.90. Google said its engineers have determined there are no technical problems with the email service or its main website. China has some of the world’s strictest Internet controls and blocks many popular social media sites, including Youtube, Facebook and Twitter. The government has intensified those efforts after pro-democracy protest erupted across the Middle East in January, the AP notes.
New All-Time High Likely For The Swiss Franc
Hey guys! I’ve been away for several days now for a business trip in the Asia-Pacific but I’m back in the Forex front! So in today’s feature, I present to you the USDCHF pair. Just last week (March 17), the Swiss franc reached a new high against the US dollar when the USD/CHF pair fell to historical low of 0.8900. You see, the pair has been trading on a downward course since June 2010. A break down from a small rising wedge last March 14 was actually the one that set the swissy to its new record high. However, after reaching 0.8900, the USDCHF pair has rebounded sharply and is now exchanging above 0.9000 again.
Since reaching 0.8900, the pair appears to be forming a symmetrical triangle or even a bearish pennant pattern. In any case, a breakdown send the pair back down to at least 0.8900 again. A presence of a hidden bearish divergence, where the price registers lower highs and the stochastics make higher highs, also suggest a probable move lower. But since the conditions is not yet overbought, as indicated by the stochastics, it could trade sideways for a while or even rally a little before heading south.
One important thing to note is that the Swiss National Bank (SNB) is notorious in intervening in the forex market as it does not want the Swiss franc to appreciate so much against the likes of the USD and EUR. So better keep your heads up at all times.
More on LaidTrades.com …
The Senior Strategist: Stabilization after wild week?
Following a wild week on the financial markets Senior Strategist Ib Fredslund Madsen takes a look at the coming week.
EUR/CAD Uptrend Might be Near the End
By Anton Eljwizat
The volatile of the EUR/CAD pair continues to be affected by the volatile forex market. The last two weeks has seen a lot of bullish strength in the EUR/CAD pair. However, as I demonstrated below, it seems that the pair’s bullish run may have run out of steam, and a bearish correction could be underway soon. This might be a good opportunity for forex traders to enter the trend at a very early stage and at a great entry price.
• Below is the daily chart of the EUR/CAD currency pair.
• The technical indicators that are used are the William Percent Range, Relative Strength Index (RSI), and Slow Stochastic.
• Point 1: The Slow Stochastic indicates a bearish cross, signaling that the next move may be in a downward direction.
• Point 2: The Relative Strength Index (RSI) indicates that the price of this cross currently floats in the overbought territory, signaling downward pressure.
• Point 3: The Williams Percent Range signals further bearishness for the pair, which in turn indicates further downward pressure to occur anytime soon.
EUR/CAD Daily Chart
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
