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Very rarely do I take a
directional stand on the market. In
today’s environment it seems like yesterday’s profit turns into tomorrow’s loss
more often than not. Then there are days
like today that scream, “if you’re ever going to be a contrarian trader, now is
the time to do it.” Multiyear
highs! Gold! Hope for August jobs! Cue the financial media mania:
The Year-to-date Daily chart below shows the percentages gained
in 2012 for the S&P 500 Index, the Emerging Markets ETF
(EEM), the Commodities ETF (DBC), and the
Agricultural ETF (DBA).
So far, the SPX has
outperformed, with a gain of 12%, followed by DBA and DBC tied at just under 4%,
and EEM with a gain of just under 3%.
As I figure, I probably have about a 60% chance that this trade isn’t going to work out. So why the heck would I even make this trade to begin with?
Because of the risk/reward that goes with making this trade.
You see, YELP has seen a surge of buying interest in recent days, going from the $17’s all the way into the $26’s.
Today you have a huge market rally and YELP is down over 3% on the day.
So my strategy is as follows:
– Wait for an ideal risk scenario where either the stock has to bounce, or I get quickly stopped out.
– Make the stop-loss where if the trade doesn’t work out, the minimum I lose is 4:1 to what I could’ve have made.
– Because YELP is so volatile and a high-beta stock – this is very possible.
Now let’s put it into practice.
– Bought YELP off of its 6-day upward trend-line (support)
– Bought near the previous lows of the day so that if it breaks those lows, I know immediately the stock is making a new leg down and that it is time to get out.
– Entry therefore is at $24.68.
– Stop-Loss is at $24.38 which gives me a maximum loss of 1.22%
– My Target is set at $25.91 (near break-even for the stock on the day), which gives me a target of 5%
– Overall then my Reward to Risk is 4:1
– That means that this type of trade setup only needs to work once out of four attempts for me to still make a profit off of it. That’s why with a likelihood of a 60% fail possibility, it is a risk i’m willing to take.
And here’s the trade setup. Red = Stop, Blue = Entry and Green = Target as I described above.
