Using An Edge To Boost Your Profits
The Dynamic Wealth Report
September 23, 2009
How The Edge Can Boost Your Profits
by Justin Bennett, Editor
I went to a pool party earlier this summer. It was a hot summer day in
Scottsdale and a little pool time was welcome. Drinking a few beers and
having a nicely grilled hamburger was also on the list.
The pool party was quite lively thanks to a rowdy game of Smash Ball.
Smash Ball is like volleyball in the water. There’s a net in the middle
of the pool. Instead of a volleyball, there’s a small ball and each
player has a paddle. We picked teams of four.
The afternoon rolled on and the beers flowed freely.
After a while, egos started talking and a sizeable bet was made. One
team was winning easily. They were confident in their Smash Ball skills. They said they could beat the others with only
two guys on their team.
The team that was losing was a little leery about putting real money on
the line.
But they had to do it…
Why? Because they had the edge.
They had a statistical advantage over the other team. The odds were
stacked in their favor. Four players versus two.
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Think of it this way. Over a long series of say 50 games, the team
with four players would have a statistical advantage over the team with
two
players. The four player team may not win every game, but they would win
the majority of the games.
They took the bet and swam away with a nice chunk of change.
This is exactly what you should be looking for in your trades.
A trading edge is where the price of a stock has higher odds of going
one direction over another. It’s where you enter a position knowing the
odds of the trade working are stacked in your favor.
Not every trade will work, but as long as the majority of trades work,
you’ll walk away all the richer.
Let me show you what I mean...
This is a chart of the
Market Vectors Gold Miners ETF (GDX). Basically,
it’s an ETF that tracks the movement of gold stocks. Its top three
holdings are
Barrick Gold (ABX),
Goldcorp (GG), and
Newmont Mining
(NEM).
Take a look at the green line. It’s called a trend line (or support
line). There’s an old saying, “the trend is your friend”. It’s stating
that a trend is more likely to continue than reverse.
The trend can give you an edge.
Notice the green circles. Those are all low risk trade entries where you
have an edge. How do you know this? Because the trend is more likely to
continue than reverse.
By buying 100 shares at the first (left) green circle, your risk is about
$210. Why? By buying at the trend line, you know if GDX breaks below the
line, you know the trade didn’t work. Enter the trade at $30. Exit
the trade at $27.90 if you’re wrong. ($30-$27.90=$2.10 x 100 shares=
$210)
As you can see, the trade worked. Your $3,000 investment (100 shares x $30
per share) went up to $3,750 in two weeks. That’s a return of 25%. Not
bad for two weeks!
Put into trader’s terms, it’s a return of 3.6 times what you risked. You
were risking $210 and made $750. So your risk reward ratio is 1 to
3.6 ($750/$210=3.6). I consider that to be a solid trade.
Repeat this process at each green circle. By simply buying where you
have an edge and keeping your risk low, you’ll be racking up big gains
in no time.
Is every trade guaranteed to work? No. But the odds are stacked in your
favor that it will. Over a long series of trades, the number of winners
will outweigh the number of losers. That’s all you need to make money in
the long run.
It’s called
the edge and you must have one before you put your money to
work in the markets.
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