believed were poised for a four-point move and then bought 1,000 shares of any of
those stocks when the move got started.
When someone asked what she did if she couldn’t find any such stocks, she
answered that she then picked the stocks that were poised for the largest moves and
simply bought more of those stocks, so that the final estimated profit still reached
$4,000. Then someone asked what happened if the stock in question only moved
half the distance. The answer to that was to continue to look for other stocks that
might be poised for a good move and buy enough of those to cover for the amount
remaining, up to the $4,000.
Finally, someone asked what she did when she lost on the first trade, to
which she responded that she now had to find several stocks to trade, or pick one
that was poised for a large enough move to make up for the loss, as well as the
$4,000 still missing in profits. When someone asked where she found these stocks,
she admitted that they where easiest to find among those stocks already priced
above $50. Too-cheap stocks weren’t worth looking at because they never made
moves large enough.
Okay, let’s stop here and ask what’s going on. She’s working with percent-
ages, and she doesn’t even know it! Let’s assume she actually manages to make
$4,000 a day, in which case she’s one hell of a trader. Can you imagine how much
she could be making if she actually knew what she was doing? The sky is the limit.
Her mistake is to only look for moves of a certain point size, instead of
moves of a certain size in relation to the estimated entry price, and then alter the
number of shares bought to reach the estimated profit of $4,000. If she does that,
she will always tie up the same amount of capital in each trade, no matter the price
of the stock.
For example, if stock ABC, which is priced at $80, is poised for a four-point
move, the amount of money she needs to tie up in the trade will be $80,000. If, on
the other hand, stock XYZ, currently priced at $40, is poised for a four-point move,
the amount of money tied up in the trade will only be $40,000. But as we all know
by now, and as the speaker admitted, the lower priced the stock, in general, the
smaller the moves. A $40 stock only needs to move half as much in dollar terms as
an $80 stock, to move the same distance in relation to their respective entry prices.
That is, if you want to give yourself the same chance to make $4,000 out of
a $40 stock as out of a four-point move in an $80 stock, you only have to look for
a two-point move and buy twice as many stocks, so that the amount invested will
be $80,000 for the $40 stock as well. But all this about the price of the stocks and
the number of shares to buy we have talked about already. Given what we have just
learned about the profit and risk factors, let’s instead look to see if this $4,000-a-
day (or trade) strategy could be something for you.
Let’s assume we have $100,000 to play with. To make $4,000 a day, with 50
percent profitable trades, we need to have a fairly tight stop loss; otherwise, the
winners needed to make up for the losses as well as the desired profits will be52 PART 1 How to Evaluate a System