Beating the stock market.

M

MathsFormula

Junior Member
Joined
Jul 13, 2014
Messages
95
Hi
Not sure if this is a genuine math question but I just need help.

I’ve been trading the stock market for years but lose money bigtime. Experts say always trade with risk : reward ratio at least 1 : 2. I’ve been following this strategy fairly regularly but more often than not I lose because the price doesn’t reach my wining target and it reverses so I lose.

As you will know the stock market price goes up AND down.

If the stock is trading at say $100/share and I think that the price will reach $120/share, I will be risking $10 for a reward of $20 [risk : reward 1:2].
I will often see the price struggling to reach $120/share. It may reach $104/share, $105/share etc. but too often the price will hit $90/share and I get stopped out and lose $10.

I’m not in front of the computer all day to watch price movements but do you think every time I log on and see a small profit, I should just take it rather than wait for the full reward?

I’ve been using a random number generator and pretending that the numbers I see are the stock prices, every time I log on to the computer. It seems there is more profit to be made by taking quick wins rather than wait for the full risk : reward ratio to play out? Am I correct? Is there a formula to show me if that is a profitable idea?

Assume there are no costs involved when placing trades.

Thank you.
 
Last edited:
I have the perfect solution for you. Look at the prices of the stocks you have purchased in the past and compute by hand what would have happened if you sold the stock at 105, 110 and115 and see if you would have made money selling at those prices. Of course I know that instead of reaching those numbers it could have reached 90 instead.
 
MathsFormula said:
Hi
Not sure if this is a genuine math question but I just need help.

I’ve been trading the stock market for years but lose money bigtime. Experts say always trade with risk : reward ratio at least 1 : 2. I’ve been following this strategy fairly regularly but more often than not I lose because the price doesn’t reach my wining target and it reverses so I lose.

As you will know the stock market price goes up AND down.

If the stock is trading at say $100/share and I think that the price will reach $120/share, I will be risking $10 for a reward of $20 [risk : reward 1:2].
I will often see the price struggling to reach $120/share. It may reach $104/share, $105/share etc. but too often the price will hit $90/share and I get stopped out and lose $10.

I’m not in front of the computer all day to watch price movements but do you think every time I log on and see a small profit, I should just take it rather than wait for the full reward?

I’ve been using a random number generator and pretending that the numbers I see are the stock prices, every time I log on to the computer. It seems there is more profit to be made by taking quick wins rather than wait for the full risk : reward ratio to play out? Am I correct? Is there a formula to show me if that is a profitable idea?

Assume there are no costs involved when placing trades.

Thank you.
Click to expand...
First, you do not understand the risk/reward ratio.

You must estimate the upside and the downside. if you think the upside on a $100 dollar stock is $120, then to have a 2 to 1 risk/reward ratio, you must think it is impossible for the stock to drop below $90, $20 profit versus $10 loss. Follow that?

Second, that analysis is way too simplistic. You really should make multiple estimates for the upside and downside and use expected values. Furthermore, you should track your estimates against results to see whether your estimates have much reliability.

Third, you need to realize that a huge proportion of the movement of an individual stock is determined by the movement of the overall stock market. Why? Because if most stocks are falling, then the market will see potential in some of those lower prices and will tend to sell your stock to get cash to invest in the others. Thus, the tendency is for a falling market to depress your stock. Of course, that all works in reverse with a rising market. So you are not just betting on your stock but partly on the market overall, and no one has a clue where that is going in the next week.

Fourth, don’t trust stock market “experts.” If they really had these secrets of success, they’d be sitting in a villa in the south of France, drinking the best of wines, surrounded by gorgeous young bedmates, and never, ever, telling the rest of the world how to beat them at their own game.
 
JeffM said:
First, you do not understand the risk/reward ratio.

You must estimate the upside and the downside. if you think the upside on a $100 dollar stock is $120, then to have a 2 to 1 risk/reward ratio, you must think it is impossible for the stock to drop below $90, $20 profit versus $10 loss. Follow that?
Click to expand...

Anything is possible. Prices go up and down when least expected like they're moving randomly. Yet one can see patterns and trends too.

I'm just looking for a mechanical system to know when to take money out.

The stock may be trading at $100/share and the long term price movement may be up. I could predict the price may even reach €200/share but I have limited money to risk so bet thinking that I'll take money at $120/share and risk only $10.

Risk reward 1:2 $10:$20

But even though I see the price rising towards $120/share more often than not (when I'm trading) the price may momentarily hit $90/share before dropping further or rising again. At $90 I get stopped out and lose $10.

I find it so difficult to win anything.

But when I use a random number generator I see that to take profit early i.e. whenever you see a profit, rather than wait for the full 1:2 ratio to play out may be a profitable method
 
^^ dropping further or then rising again

Its like more energy is required for the price to move to $20 up than to drop by $10
 
Last edited:
I see that you grasp the basic math of risk/return now: it is a ratio of potential loss against potential profit. Good.

Yes of course the prices could be almost anything (the price of a stock can’t go negative: that is what limited liability is all about). But notice that I talked about expected values, which means probabilities. I suggested that you estimate the probabilities of various prices. The moment the price reaches a level where the probabilities of it going higher do not exceed 50%, sell. That is logical. Of course, the whole idea depends on how good your estimates of future potential prices is.

I reiterate my point that there is no generally known formula for making money trading in the stock market. If there were, everyone would use it and drain it of any possible profit potential.
 
JeffM said:
Fourth, don’t trust stock market “experts.” If they really had these secrets of success, they’d be sitting in a villa in the south of France, drinking the best of wines, surrounded by gorgeous young bedmates, and never, ever, telling the rest of the world how to beat them at their own game.
Click to expand...

I completely agree with the above.

I've noticed that these experts will sometimes advise people to follow their trading blog where they'll show their own trades in real time. I'm probably quite a cynic, but I think the goal of this is to get lots of people buying the same stock that they've just bought. This will then help to push the price of that stock up. Then, of course, they will sell before they advise everyone else to sell. Unless you're very quick to respond then you'll loose out as the price responds by dropping back.

I will offer you sensible advice:- paper trade for a long time before considering taking the plunge for real, and DO take into account the trading costs.
 
You must log in or register to reply here.
Top