New targets for stocks under $20

In my data analysis I have found an interesting bit of information having to do with entry prices and profit targets specifically for stocks priced under $20.

I had posted entries for CMC at $14.50 and $15.00 as a short sell and posted the targets as $13.00 and $14.00 respectively creating a $1 and $1.50 gain. I will be changing that.

Basically any trade will have three possible entries for stocks under $20:

Considering a long trade rather than the CMC short above for demonstration purposes:

(BTW CMC scooted back above the $14.50 first entry target today.)

Entry 1 - $17.00 Profit target - $18.50 Gain - $1.50

Entry 2 - $16.50 Profit target - $17.50 Gain - $1.00

Entry 3 - $16.00 Profit target - $16.50 Gain - $0.50

Full stop at $15.50 without extenuating circumstances

A full trade hitting the targets would gain and average of$1 per share overall.

A full stop will lose and average $1 overall.

If each entry were 100 shares that would be a $300 gain or a $300 loss.

In crunching the numbers for the trades I have so far found that over 75% (this is not an average, this is the minimum taken from the poorest performing stock) of the first entries hit their target profit of $1.50. It led me to wonder why I should limit the second entry to a $1 profit when, 75% to 92% of the time the larger profit gets hit which means that the lower profit also gets hit on the way past. In fact it will hit between 86% and 100% of the time. The same goes for the 3rd entry although if the third entry gets hit the average of the first getting hit afterwards is between 72% and 80%.

It is worth noting that no matter the entry the Maximum Loss Allowance will always be the same. Therefore it would be prudent to increase the profit potential, given the odds of success, in order to skew the trades in favour of better gains for capital risked.

In that vein I left the entries alone and changed the exits to allow a full $1.50 for each trade entered. This results in an average $1.50 overall compared to the average $1.00 overall.

For the same entry of three trades at 100 shares that would be a $450 gain or the same $300 loss.

I like a profit / loss ratio of better than 1:1 and this at least makes it 1.5:1. Add that to an over 72% win rate for just these larger trades and that really adds up fast.

Jeff.