PX - Higher Risk Than Reward

PX price last Friday stopped just below line2 resistance (6.65).

In computing for risk reward ratio for PX, we first draw the major resistance line which is the high of Nov 9, 2007 and Mar 4, 2008. We then make three duplicate lines and move it to lower resistance points and gaps. From these 4 perfect parallel lines, we take our supports and resistances. Line 1 resistance is at 7.49 and Line 4 support is at 5.53. Computing for risk reward ratio at 6.60, risk is at 1.07 and reward is at 0.89 therefore risk reward ratio is 1.2 (What?!? A whole number? Our target is only 0.33 and below.) And that is not yet considering "What if it breaks line 4?". That line 5 can bring PX to 4 pesos. If you still want to gamble with PX, buy if line 2 is taken out but be sure to exit fast if this turn south for it might be quick and it might be deep.

With a higher risk than reward, PX is only for the brave and gutsy.

Something's Cooking with Tuna

Tuna made a run up yesterday. The 5MA already crossed the 35MA (1), volume is twice volumeEMA (2), stochastics already signal a BUY (4). The only concern is the MACD (3). For some traders, they will wait for the MACD to signal a BUY too. Without the MACD confirmation, it will be a risky trade.

So if you plan to buy TUNA, compute your risk reward ratio before entering a trade. It closed at 2.00 yesterday. Risk is 2-1.86=0.14 and reward is 2.24-2=0.24. Ratio is 0.14/0.24=0.58. It did not pass the 1:3 (0.33) ratio criteria.

What price will give us 1:3 risk reward ratio? Back computing, we get 1.94 as entry price. Risk of 1.94-1.86=0.08 and reward is 2.24-1.94=0.3. Ratio is 0.08/0.3=0.27 which is even better than 1:3. Risk reward ratio of an entry price of 1.96 is 0.35 which is slightly above 1:3.

Therefore the best entry is at 1.94-1.96. Wait for a retracement at 1.94-1.96 or wait for the MACD to cross and signal a BUY.

Special Request From Pat - OV,OPM,PCOR

Usually the stocks that you'll see here are those that I have in my portfolio (The only stock I have right now is PAX) thus I am monitoring if it will break support line or when it's time to sell. I am also studying some stocks I plan to buy like BRN so I can determine the right entry point.

Let me deviate on this for a while and will give in to Pat's request of featuring OV, OPM and PCOR.
Let me start with PCOR. There is a potential head and shoulder pattern being completed (this is more visible in the weekly chart). The trendline is pointing deep. The 50MA cross down 200MA, DMI is below 20 and MACD is about to cross zero line. If I were you, I will avoid this.

In analyzing stock charts, I usually start with the overall picture of the chart from way back 10 yrs or depending on how far is the available data. I try to assess if the stock I'm looking at is on the upward or downward wave cycle based on Elliott Wave theory. Unfortunately, OV has just finished its upward wave cycle and is on its first leg of the downward cycle. We don't know how low this leg can be. There are some downward cycle that are just shallow and tend to just consolidate/move sideways. How deep or how shallow this next downward cycle will be is something the chart cannot tell. It is only known at hindsight. Also the head and shoulder pattern is potentially completing it's downward leg.

How is OPM related with OV? I see the same pattern with OV and OPM so I decided not to post OPM chart anymore.

Mission Of This Site

I am delighted to know that the few who have already visited this site messaged me that they like this site. Thank you. I'll be more than delighted if many reading this blog will learn how to draw the lines of support and resistance, identify where those support and resistance are, know how to compute for the risk reward ratio and be equipped in deciding when to enter and exit a trade.

Gaps are levels of support and resistance

Aside from the support and resistance lines drawn by connecting the lows or the highs, gaps are also levels of support and resistance. One nice example today is BRN. The gap up at 3.20 last Jan 21, 2008 serves as the resistance on the run up that happen today at BRN. The support was provided by the high of Jan 18, 2008 (3.05). If you intend to enter, wait for a retracement where resistance is 3.05. Support can be provided by the downward line connecting Feb 19, 2008 and March 12, 2008. It would be crossing tommorrow at 2.84. I'm just concerned that the support that will catch you is on a downward bias and will further slide down soon as you enter. Another scenario could be BRN will take out the gap therefore the best entry I guess is after 3.20 is taken out with volume.

Learning to Compute for Risk Reward Ratio

Let us start studying risk reward ratio using PAX data. I have removed the overall picture and just focus on the data from Feb 15, 2008 - March 24, 2008.

In determining the risk reward ratio, I first assess where my support and resistance are. The support line (labeled recovery line 1) is drawn by connecting the low of Feb 15, 2008 (2.95) and the low of March 11, 2008 (3.10) and extended to the right side of the chart. That line crossed March 17, 2008 at 3.14, which gives a nice support on the downtrending price. After hitting 3.15, the price bounce up and close at 3.20 that day and heads up on the succeding days.

Now we have identify our support, let us now assess our data and look for that level that will give us the resistance. Price retraces to its lowest at 3.70 on Feb 27, 2008 and bounce up. The 3.70 level gives a support during that retracement. When that support was broken, it reverse its role from support to resistance. We can identify the 3.70 level to give resistance to the rallying prices on its way up.

Having identified support and resistance, let us now look at our risk-reward ratio if we want to enter PAX. Closing price on March 24, 2008 is 3.45. If we don't have PAX and plan to buy the next day, March 25, 2008, we should study our chances of winning. Assuming it will open at 3.40 the next day, let us see how is our ratio if we will be buying at 3.40.

Risk is the difference between support and our planned entry price. The support line we have discussed above will be crossing at 3.18 on March 25, 2008. Entering at 3.40, our risk is 3.40-3.20 (The price based on fluctuation) which is 0.2.

Reward is the difference between resistance and our planned entry price. Subtracting 3.70 with 3.40, our estimated reward is 0.3.

Ratio is the quotient from dividing risk by reward. Our ratio therefore is 0.2/0.3 (2:3) or 0.67

Question: Is 3.40 a good entry? No because the best entry is at 1:3 ratio or 0.33. So what will you do if you want to buy PAX? Wait for an entry price that will give a ratio of 0.33 or lower. The odds should be in your favor.

What is Risk and Reward Ratio?

In trading the stock market, there is always risk and there is always reward. I'll start by defining these terms in the simplest way I can. Risk means the potential amount of money that you will lose in a trade and reward means the potential amount of money that you can earn from a trade. The ratio shows the relationship of the two. The risk reward ratio is derived by dividing risk by the reward. The lower the number, the better of course.

Though we want to be rewarded with the maximum profit, we should also understand that in every reward there is a corresponding risk. Many says that the higher the risk, the higher the reward. I disagree on that saying. You can control the amount of risk and maximize your reward if you do advance study and preparations before getting in the trade.

That will be the focus of this site. Although we will be presenting technical charts and we'll be doing technical analysis on stocks listed at the Philippine Stock Exchange, our goal is to learn how to determine the risk reward ratio that will control our risk while optimizing our profit. Our goal is to enter a trade where Risk Reward Ratio is 1:3 (0.33) or lower. The odds should be in our favor.

This site will give you ideas on the support and resistance of the stock using technical analysis. What it will not do is advise you an exact entry and exit point because risk tolerance of every individual varies.

A House for My Charts

Finally, my technical analysis charts found it's own place. Just creating my first post to get the feel of this house.