First understand the chance-risk-ratio concept …

To identify low risk entry points you first have to understand the chance-risk-ratio. The concept is simple:

Possible profit / planned loss = chance-risk-ratio.

The possible profit is the money you will win if your trade works as expected. To get this number, you must subtract the target from your entry price. Example: $70 target – 50$ entry price = $20 profit.

The planned loss is the amount of money you are risking. It’s the difference between your entry price and stop loss. Example: $50 entry price – $45 stop loss = $5 planned loss or risk.

Now you have all you need. Here is your chance-risk-ratio:

$20 profit / $5 planned loss = 4.

If your trade reached the target, the return will be 4 times of your initial risk. That’s a good chance-risk-ratio.

Why is the chance-risk-ratio important?

You should only risk money if it’s attractive. Don’t place bets where you only get a small return. Of course it depends on the hit-rate but you want to calculate for the worst case.

If your hit-rate decreases, you need a higher chance-risk-ratio. Because it’s very difficult to maintain a high hit-rate over time, you want to consider this. Try to reach higher chance-risk-ration instead of having a high hit-rate. Then you have build-in a buffer for failure.

What’s a good chance-risk-ratio?

That depends on you and your trading style. If you are a long-term trader, you often have a higher average chance-risk-ratio. If you are a short-term trader, you mostly have a lower average chance-risk-ratio and a higher hit-rate.

The same is true for trading styles. Trend followers often have a high chance-risk-ratio because they are following a trade for a longer time. A swing trader often has a lower chance-risk-ratio because he works with targets.

I personally don’t work with targets. Instead I apply a more trend following style. If a trade will return 3-5 times my initial risk, it’s a good trade. My best trades will return 10-20 times my initial risk.

Paul Tudor Jones famously said, that he will at least aim for a 5 times chance-risk-ratio.

What’s low risk entry point?

It’s simple: The smaller your planned loss or initial risk, the lower is the risk at the entry point.

Don’t think that a trade with a low risk entry point has a smaller risk to fail. That’s nonsense. In the short term every trade has the same odds: 50%. It can be a winner or loser. Only over a large number of trades you will generate a hit-rate and edge.

Focus on trades where you can place a stop loss very close to the entry point. That’s only possible if you select an entry where you see quickly if your trade works or not.

3 examples of different entry points

How to select a valid stop loss level?

I could write a whole own blog post about selecting stop loss levels. But remember: A stop loss level should be your insurance. It should show you clearly that the trade is not working and you have to exit immediately.

I personally only select trades where my stop loss level is less than 7% away. Often I exit a trade or sell a portion of my position at a drop of less than 5%.

If I select a good entry at the right time, the price will never come back to my entry price. Therefore something must be wrong if a stock drops 5-7% after my entry. I give enough room for daily fluctuations but not for corrections!

A simple and clear entry signal and a technical level close to the entry price are important. I mostly use simple chat patterns like flags, triangles or multiple tested resistance lines. For a stop loss I used the last low or a moving average like 10 or 20. That’s it.

If a trade is not working, you can’t do anything. Get out and try it again at a later point. The more important thing is that you have a close stop loss. If the trade is working instead, you have a great chance-risk-ratio.

A low risk entry point needs discipline

If you select a value for your maximum stop loss level, you created a rule. Every rule needs discipline to apply it. If you don’t do that, the rules is worthless.

I personally stick to my rules. I never open a position where the stop loss level is more than 7-10% away. 10% is the maximum I only allow for very volatile stocks. If a stop loss is more than 10% away I skip the trade and wait for a better entry.

A low risk entry will not help you if you don’t have sound rules to select great stocks. You need rules to select potential winners which will generate a good chance-risk-ratio. If you created you rules for a maximum stop loss level, you can start to optimize your selection criteria for stocks. That will increase you hit rate over time.

Der Beitrag How to identify low risk entry points erschien zuerst auf Trading Blog - Julian Komar.

I always try to combine 2 dimensions:

1. Technical strength and chart pattern.
2. Potential to surprise and create high demand.

Baozun – High potential China eCommerce stock

I never analyze fundamentals or try to interpret them. The reason: I believe that the fundamentals are always late and the price will move before. But I want to make sure that a stock has potential to surprise and attract money.

Baozun belongs to the China eCommerce sector. It’s a young company and the stock has only 2,5 years trading history. That’s good because the best price moves happens in the first few years of the stock. The reason is simple: The company is unknown and if it’s an attractive company, a lot of potential buyers are willing to buy. In addition a company will make an IPO if the fundamentals and growth are extraordinary good. So young stocks are always better than old stocks, where every detail is known and the company cannot surprise the market.

China is a huge growth market. It doesn’t matter how fast China growths. It’s only important that investors are interested in China stocks and see a bright future. That leads to increasing prices for stocks of that sector.

In addition Baozun is in the eCommerce sector. That is an additionally plus because this sector is growing fast and will revolutionize the traditional old retail sector. A company like Baozun can profit from that and maybe can grow faster than any other company. There is a huge potential for surprises.

You can see that Baozun has high potential: Growth from China, growth from internet sector. In addition the EPS growth is very high, also sales are increasing. The IBD rating for that stock is good.

Technical strength and potential

Now we come to the more important part in my opinion. A young stock with a high potential should trade on new all-time highs. Of course Baozun is doing that. Every new high is a new all-time high and there is no overhead resistance.

The stock rose 1200% from the low in August 2015 until today. Is this too high? No! Stocks with such a growth rate can reach much higher prices. Of course the P/E ratio with around 90 seems to be high, but the forward P/E ratio only reaches 26! I don’t work with P/E ratio, but you can see that there is a lot of potential to the upside as long as the company growths. Always have in mind that a stock can rise much, much higher if there is a high demand and a strong trend.

The trading volume of Baozun increases in May 2017. That shows that institutional money is flowing into the stock and the liquidity increased. Higher liquidity, a strong trend and good fundamentals means that more and more institutional traders will have that stock on their list.

I am not a big fan of price goals. I never use them. But I cannot see any reason why this stock should not go higher and trade at $100 or more.

The Baozun weekly chart

In the weekly chart you can see that this stock has not a long trading history. That’s good! Young and fresh stocks with less than 10 years trading history produces the strongest trends. You can see that if you go back in time in stocks like Apple, Amazon etc.

You can also see that the stock is trading at all-time high prices. That’s good, too! There is no one you needs to sell to close a past trading position at break-even. And there are no history prices which can be used as orientation marks for trader.

Look at the volume. It’s increasing which shows a higher interests in the stock. There are two big shakeouts which throw out all weak hands and leave room for new traders. In addition the volume is higher on strong weeks and lower in consolidation. That’s exactly what you want to see: Strong buyers and weak sellers.

Daily chart of Baozun

The daily chart shows perfectly the consolidation between September 2017 and February 2018. The trading volume dries up in that time which shows me that not a lot of stock holders are willing to sell. This is a good signs because the strong hands will hold their positions.

With the earnings in February 2018 the stock exploded and gapped up to a new all-time high. This is a very good sign. There is a lot of demand behind it! The buying continues the whole day and you can see the terrific trading volume at that day: 10 times the average 50 day volume!

Now the stock consolidates calmly and prepares the next move. When it’s time to enter? I don’t know, but you will see it if a new all-time high is printed with higher volume.

Of course don’t ignore other scenarios. The stock can gap down on bad news and destroy the whole chart situation. That’s why I only act if I see a strong breakout and new buying pressure.

Recommended books

Here is a small list of recommended trading books about this topic.

[amazon box=”B0755Y5LCZ,0071494715,0071614133″]

Der Beitrag Baozun ($BZUN) chart analysis – China eCommerce stock erschien zuerst auf Trading Blog - Julian Komar.

For a lot of people it goes against their beliefs to buy new highs. Why? Because the stock seems to be expensive in that moment. But the stock market works not like a supermarket. Cheap stocks are mostly not a bargain, they are rotten eggs.

The most persuading argument for me to buy a stock on a new all-time high is: What must a stock do if it should move up 10.000% in a row? Answer: It must take out old highs and reach new highs.

Example: Amazon – New highs are buying opportunities

Amazon is one of the most successful stocks in the last years. I put a simple 52 week high line (with a Donchian Channel) on the chart. You can see clearly that every 52 week high was a buy opportunity.

Of course the stock had some seriously corrections, but that’s why you need a trading system with risk management and not only one indicator.

There are plenty of similar charts next to Amazon like Apple, Netflix, Nvdia and many more. All these super stocks have in common that they continuously reaching new 52 week highs and especially all-time highs.

The difference between a 52 week high and an all-time high: Overhead resistance

Not in all cases is there a difference between a 52 week high and an all-time high. Because if a stock is priced on an all-time high, it is automatically a 52 week high. The only difference is “overhead resistance“.

With overhead resistance I mean all potential seller that would sell a stock at higher prices. These traders had bought a stock at a higher price and now their trading positions show a loss. If the price returns now to a higher price they maybe close their position for break-even. The problem is that a seller is a seller and they are able to stop a price move.

If a stock is priced on an all-time high, the stock has “blue sky potential“. That means every trader has a position that shows a profit. No one is urged to sell because the trading position hurts.

But there are situations where the overhead resistance is absorbed by other traders. In these situations the stock quickly moves to new highs and afterwards maybe to new all-time highs.

All-time high trends lasting longer as you think

A stock with “blue sky potential” can trend longer as you think. If there is no serious selling pressure, the stock can move a long time until it hits resistance.

Stocks on new all-time highs have no technical resistance because there is no trading history. A trader cannot look back and search for important price barriers other similar. The only situation where an all-time high stock can reverse is if the bias in the stock changes. This normally takes a longer time and is caused by bad news.

You will see a change in an all-time high stock quickly. Normally it is gapping down or moves quickly to the downside. In that situation new overhead-resistance is created.

But if there is no bad news or anything similar, the stock can move much longer as you think.

Bull markets and new highs

Of course all upper examples are selected in hindsight. But normally bull markets produces a lot of similar examples.

It’s not possible to catch every superstock but you may ask yourself: Where do I want to fish?

• Do I want to fish in a sea with small, stinky fishes and where my odds are bad to fish a big one?
• Or do I want to fish in a sea where some really big fishes are swimming.

I prefer the last one.

So you can see that the important question is about the odds. That’s what stock selection is about. If you combine multiple criteria, the odds will increase and you maybe fish a really big fish out of the sea of stocks.

Should I trade in the weekly chart because of 52 week highs?

You can do it if weekly charts are your preferred time-frame. But it’s not necessary. I personally prefer the daily chart. And you should not blindly use a 52 week high as a trading signal.

The upper examples should give you an idea about stock selection. It’s much easier to trade a stock on a new all-time high. The selection is easier because the stocks are obviously visible, there is no overhead-resistance, often smooth trends emerge and the moves to the up-side are faster. That’s why I look for stocks on new all-time highs.

Recommended books

Here is a small list of recommended trading books about this topic.

[amazon box=”0071494715,0071614133,0071807225″]

Der Beitrag Buy high – sell higher: What must a stock do to rise 10.000%? erschien zuerst auf Trading Blog - Julian Komar.

How can we analyze the markets without a too big influence of our emotions? We look at price charts.

Price charts telling us everything we must know:

• The direction (up, down, sideways).
• The strength of a move (volume).
• The highest odds for the next move (continuation of the current trend).

OK, let’s look at the markets from a higher time-frame. The higher time-frame tunes out the noise of daily fluctuations. This makes it easier to see what’s really going on.

S&P 500 – Strong bull market with pauses

There is a clear bull market in S&P 500 stocks. The price is moving up and the last weeks the move accelerated.

This week the down move wiped out two weeks of strong gains. In addition the volume was higher, but not excessive.

Is it a top now? We don’t know. But the odds that the trend will continue are higher. Maybe there will be a pause for some weeks or months. If the price prints a new all-time high it is a clear sign that the trend continues. Until that it is likely that the market will take a pause.

The bearish scenario is far away. Of course the market can crash, but it’s not very likely. If you look back in the charts, you will see that a real market top needs weeks and months to build.

Nasdaq – Smooth up-trend with consolidations

The Nasdaq shows the same picture: Strong up-trend with acceleration. Now the price moved down for a week and maybe started a new consolidation.

You can see a similar pattern in April to June last year. There was a strong down week and a bull flag pattern. After the price reached the weekly 20 EMA (~100 daily EMA), the trend continued.

The only thing what catches my attention is the volume. It’s very strong during down-moves. But the strong volume is not accompanied by price movement. Maybe there are other reasons for that. In addition it’s a sign that the high volume is absorbed by the market participants.

If you look at the chart, does it looks like a top? No! It’s currently far away from that.

Russell 2000 – The weakest index

I mostly trade small and mid cap stocks. That’s why I pay a lot of attention to the Russell 2000 index. You can see in the chart that this index is much more volatile than the big cap indices. That makes it more difficult to trade.

But the overall picture is clear bullish. There are higher lows and higher highs. And that is by definition an up-trend.

As long as the Russell 2000 trades above the last big consolidation phase in August 2016 to July 2017, everything is ok. If the price moves below $143 ($IWM) it will be a first warning sign. But we are far away from that.

The violation of the last high this week is not a good sign. But it’s still not a trend reversal. It just say that the volatility will continue.

You can see that a look in the weekly chart gives you a much clearer picture. If you look into the daily charts instead, you will see much more volatility. The bigger picture can give you more confidence and objectivity.

T-BOND – A new trend arrived in bonds and interest rates

For me the bonds are currently a very interesting market. Why? They starting a new down-trend. If you look at the 2 year, 5 year or 10 year note, you will see that they move much faster as the 30 year T-Bond.

Yes, maybe the new trend has to do with the FED politics. But the reason is not important. As Paul Tudor Jones famously said: “… It’s your job as a trader to buy what’s going up and to sell what’s going down …”.

The chart tells you everything you must know:

• Head and should pattern is a sign for a trend change.
• There is already a down-trend in place.
• All moving averages are aligned in a bearish fashion.
• The volume increases with the price down-move.
• The last lows are taken out and the trend continues.

There are several possibilities to profit from that new trend. For example you can buy an inverse ETF or trade the future directly.

Gold – Waiting for a decision

The last weeks showed a strong up-move in gold. But if you look at the weekly chart, you can see quickly that’s just a move in a consolidation.

If you want to make big profits you need the upper timeframes behind you. If the upper timeframe is in a consolidation, the lower timeframes mostly are volatile.

You don’t want to trade a market in a consolidation. There can be quick reversals and high volatility. You only want to trade markets in a clear trend which is supported by institutions (smart money). Why? They move the markets and start/support huge trends. If they are not interested in a specific market, you can se it by low volume. As soon as they rush into the market, the volume will pick up and the price moves stronger.

Back to gold. They will be a decision: Breakout or breakdown. Do not anticipate! Wait instead until the chart and volume speaks.

Crude oil – Energy markets in a bull run

The last weeks Crude oil showed a nice up-move. Before the up-move started there was a one year sideway bottom consolidation. You can see the head and shoulders formation which is a sign for a trend reversal.

But if you look at the monthly chart, everything looks different. The current up-move is just a small fluctuation in a down-trend. There can be sharp reversals and set backs. But the opposite it also true. There can be up-trends which lasts weeks and you can profit from them.

I like that the last up-move showed low volatility. It’s a good sign and the market participants show no doubts. We will see how long the up-move will go on.

US-Dollar – New down-move started

The US-Dollar future is mostly the same as the forex pair USD/EUR (or EUR/USD). And yes, there are correlations to Crude oil and gold. But it’s a very interesting market at the moment.

I always try to get into new trends. New trends shows mostly a stronger move because everyone tries to get in and that gives the trend new fuel.

US-Dollar is breaking down from a long top. You can see the first down leg in the chart picture. Now the second leg has started. The odds are high that the down trend will stay for some time.

There are several instruments to profit from this trend: Futures, options, ETFs, forex or the money market itself.

Recommended books

Here is a small list of recommended trading books about this topic.

[amazon box=”0735200661,0735201447,007147871X”]

Der Beitrag Market overview: Stock market, Bonds, Oil, Gold, US-Dollar erschien zuerst auf Trading Blog - Julian Komar.