TV Financial Advice

Today on one of the TV financial program, I noticed that the financial expert is recommending a buy for stock with a Buy price at $45, Target at $50 and stop-loss at $42.5 and the reason for entry is a technical breakout. I can’t remember the name of the stock. But I don’t think the name or the nature of the stock matter in this case. What I am thinking is that the financial advice given is not for the majority of the audience. So in that recommendation, we are talking about a target profit of 11% ROI with a stop loss place at 5.5% on our entry price. To me 11% ROI is not a good return to aim for and 2nd thing is the target to stop loss ratio is too close. In this case is 2:1. Which means we will break even if we had 2 losses and 1 win. This ratio should be increase in order to be more profitable on the long run. I heard trader that had 9 losses and 1 win but at the end they still get a profit. This is because their one Wining trade had already covered all the loss from their losing trades. The point I want to make here is in order to be profitable trading shares in the long run. The entry is not that important compare to the exit. Let say there is three ways a share price can go, UP, DOWN or Sideway. So theoretical the probability of the price going up will be about 33%. Let assume your probability of wining is about 30% and loss about 70%. With a high target to stop loss ratio of 5:1. Which means everytime you win, you profit 5 times more than your losing trade. So 1 win will cover 5 losses. In 10 trades, if you win 3 trades, you will be able to cover 15 losses. At the end of 10 trades, with 3 wins and 7 loses you should still be profitable even though you had more losing trade than wining trades.


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