Risk vs Reward. Which of These Two Trades Would You Take? Experts We Need Your Help

Discussion in 'Trading' started by riskfreetrading, Jun 5, 2008.

  1. Trading is difficult. But let us see if it is that easy even in hindsight. So I have these trades for you to ponder, help us understand, and pick your trades.

    Experts we need your help on this one (risk, reward, and information value).

    In hindsight everything is known. But let us consider an incomplete hindsight. To make the case a bit concrete, let us say that there is a One Stock House around the corner, where you can go do some "trading" because you cannot trade during the day. You have no source of information whatsoever, except what the house gives you.

    There is only one stock that you can trade. You can either go LONG the stock, or Short the stock. You are always given the Open price. You do not know anything else except what will be given to you in the questions below.

    The Stock Open price is $10.255. The Closing price is unknown. The gain and loss (except when otherwise indicated) is the difference between Closing Price and Open Price. The One Stock House gives you the High Price and the Low Price of the stock which are $10.18 and $10.28.

    1. Question 1: What is the reward/risk ratio if you were to go long or short the stock?

    2. Question 2: Would you go long the stock or short the stock?

    3. Question 3: In two separate corners of the House there are two sources named LS and SS (LongSource and ShortSource) from which you can drink a healthy liquid which gives its drinker an edge on the probability of the stock closing higher or lower than the Open Price. You can drink only from one source, and it is free (before your start dreaming, the liquid is not beer).

    Which source will you drink from?

    4. Question 4: The One Stock House has another play for you. You can drink from one of the two sources, but you have to long the stock if you drink from the LS source, or short the stock if you drink from the SS source. You and the house then replay the time-sales tape. You have to put a trailing stop on your trade whether long or short.

    Would you drink from the LL source or the SS source?

    5.Question 5: If you were to help the House put a price sticker to the LL source and LS source, would recommend a free service or a premium service for these sources and why?

    Feel free to answer just one of these questions or to simply comments on them without any answer at all.
  2. timbo


    If you were really a smart guy, you wouldn't have 5 questions regarding hypotheticals.
  3. bespoke


    1. True
    2. True
    3. False
    4. False
    5. True
  4. English is apparently not riskfreetrading's first language, so he tends to express himself in rather verbose and cryptic terms.

    Here is what he is really asking:

    If the stock's previous day range is $10 to $11, and it opened today at $10.90, is it more likely to close up or down today?

    The answer is, it's 50/50.
  5. That is not a correct understanding. The question is exactly as stated. If you have questions to further understand it, ask them. Do not search anywhere else.
  6. Well, in that case, I bet no one understands your question. What are the "High Price and the Low Price of the stock which are $10.18 and $10.28"? For what period? And why is the "high price" lower than the "low price"?
  7. The period does not matter. Think of it as one bar (it has an open, a high, a low, and a close). You do not know the close.

    For the last question you can view it as zoming in on that bar.
  8. timbo


    Reminds me of Joseph Smith.
  9. Now I am even more confused. I guess what you are asking is "what is the likely close of the bar, given the bar's open, high, and low"? Is that right?
  10. Imagine that it is 4PM. The market just closed. You were busy, and did not watch the stock at all. Then you go to that House where you can play the game of the stock. Outcome: you receive or lose the difference being the difference between Open price and Closing price.

    If you think the high and low do not help, then fine, just answer as you think is right.
    #10     Jun 6, 2008