Friday, May 09, 2008

Flip #2: Fairfax Financial Holdings Limited (NYSE:FFH)

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I made another flip trade, this time in Fairfax Financial Holdings Limited (USA) (NYSE: FFH). Bought yesterday (too soon) on the TSX exchange at 280.38 CAD, then flipped it today at 285 CAD.

Though it looks like I made some decent money, I was also risking a lot of money, so in terms of risk, I made less than 1R. All those traders who live and die by the religion of how much money they put at risk in a trade are overlooking one key factor. I have developed my own theory about risk, and it involves the notion that risk is not only about the size of your stop, but it is also about the probability of an event happening. If I risk 1R (where R=amount of dollars risked) on a trading pattern that has 51% success rate, then I make ((51wins - 49loss)/100) ==> 2% of 1R over time. However, if I risk 0.5R on a trading pattern with a 75% success rate, then I make 50% of 0.5R over time. So with the probabilities in my favour, I can risk less and still attain better results. And to take it one step further, if I know I have a high probability play, then I can risk more, which is what I did with my FairFax flip. I'll make another post (complete with a chart) explaining in more detail as to why I felt the FFH flip was a high probability play.

Anyways, I should post these trades in real time to make it more legit, instead of after the fact. But it is what it is.

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