Hello everybody, particularly Paul and Jonny T
I think your Risk/Reward calculation is a bit misleading. The obvious inference is that you can improve the ratio by either reducing your stop loss or increasing your target price. Either of these could result in disaster. A better way of looking at risk and reward is to include some assessment of the probability of the SL being breached and of the target being reached.
For example, you might conclude that, based on the figures you mentioned, the probability of 820p being breached was 20%, but increasing the SL to 850 would increase the probability to 50%. Similarly, it seems logical to assume that the higher you set your target price, the lower the probability of achieving that figure. At the price quoted by Paul (862p) you might assess that the probability of reaching 900p was 75%, but that would decline as the target price increased. You might conclude that the probability of reaching 1080 within a reasonable timescale was only 35%. This would give (for want of a better term) a Probability Ratio of 35/25 or 1.4.
In the figures I have given, the Probability Ratio for a target price of 900p with a SL of 820 (ie a small, quick profit) would be 3.75. If the SL was reduced to 850 the Probability Ratio would give a negative for a target of 1080 and a ratio of 1.5 for a target of 900p.
This approach gives a more realistic assessment of the risk involved, but does require an estimate of probability for the target and SL.
I put this suggestion forward for discussion.
John |