I have a real issue with magicians. I put them in the same category with clowns, mimes, and Canadian teen idol singing sensations; they just creep me out. I mean just look at David Copperfield and the late Doug Henning…do I need to say more?
However, just because I don’t like magicians doesn’t mean I don’t like magic. Today I am going to show you some trading magic that will make you profitable even if you lose on two thirds of your trades.
RECENT PICKS
In the last month I have done three posts on three separate stock trades. The first in was in Morgan Stanley (MS) where I suggested risking 50 cents for a potential $3.00 gain.
Then next was in Chesapeake Energy (CHK) where the risk was $1.00 for a $5.00 reward.
The last was in Vocaltech Communications (CALL) which risked $1.00 but didn’t have a specified reward target.
MS did trigger and hit its target. CHK triggered, but failed for a possible $1.00 loss. And CALL didn’t trigger, but let’s just say it did and you lost a buck on it.
But where is the magic O’ Great Lundini?
POSITION SIZING
The magic is in how you size your positions. By taking a set percentage of your account equity, you end up with a fixed dollar amount of risk capital on each trade. You divide that dollar amount by the spread between your entry and stop on each trade ($.50 on MS, $1.00 on CHK, and $1.00 on CALL). That gives you your position size on each individual trade.
You then are risking a standard fixed amount or “R” on each trade.
DO THE MATH
On the CHK trade you then lost 1R. On the CALL trade, 1R as well. But you made 6R on the MS trade, for a net profit of 4R.
So even though you lost on 66% of the trades I suggested, you are net profitable.
Alakazam…..!
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Click here for a Feature story on position sizing.
For specific trading ideas read our daily Markets section here.
