Day Trader column for October 23 – 2012

The All Ords just managed to trade above the 4,600 level intraday last Thursday and closed the week just below that level. As all markets (the All Ords is no exception) find resistance at round numbers, it is likely we will see some consolidation around 4,600 before a further move. A check of the chart of All Ords will confirm the above, as there was some consolidation at every round hundred since the recent move up began in June this year.

Last week I said I would buy Evolution Mining (EVN) on Monday and I bought 4,000 shares at $1.99 each for a total of $7,980 including brokerage. The initial stop was $1.87 which was the spike low formed on October 9. After a subsequent spike low formed on October 15 the stop was raised to that level which was $1.93. The target price is $3.00 which is found by mirroring the pattern formed since 2010, which also happens to be the adjusted all time high formed in 2003.

Depending how the market is running if the price reaches the $3.00 target, I may sell around that price if the index is at a new resistance level and EVN shows signs of reversing.

The other transaction last week was the sale of Macphersons Resources (MRP) which closed below its stop on Thursday and was sold on Friday at 35 cents for a total of $6,980. On Friday the price opened at 35 cents where I sold, and moved up all day to close at 38.5 cents. This was one of those occasions which shakes the faith of inexperienced traders in the use of stops. It remains to be seen if the move up on Friday continues. If it does I will look to buy it again if it closes above 40 cents.

After a stop is triggered and the price opens down with a gap, some traders put a sell order in above the opening price, hoping to get a higher price to reduce the loss. I have found the problem with this strategy is, if the break is not a false break and the price continues to fall, losses mount. If this loss increases above the traders comfort level, they will often continue to hold the stock and watch in horror as the price continues to fall and losses increase.

My strategy is to take the loss and then re-evaluate the position.

Continuing on from last week, you should now have decided on your personal risk amount and halved it as suggested. (MRP was a good example of why the figure should be halved)

The next step in the process is to calculate the risk reward ratio. As our calculations are done before the market opens, assume the opening price will be yesterday’s closing price.

The difference between this expected opening price and the stop price is the amount in cents per share that will be at risk. Now look at the target price and calculate the price difference between the target price and the expected opening price and we have the reward figure. Aim for a reward three times the risk. That is a risk reward ratio of 3:1

To view past columns and all the steps in my trading process. goto: www.thedaytrader.com.au

Portfolio Position

Stock

No. of Shares

Purchase price

Stop

Fridays Close

AMM

5,000

$1.16

$1.27

$1.31

MXI

6,000

78 cents

88 cents

$1.08

PBT

15,000

23.5 cents

23 cents

29 cents

EVN

4,000

$1.99

$1.93

$2.10

Cash $267,402

Shares $25,780

Total $293,182

Starting capital $50,000 in July 2006