FOE daily Feb 5th
FOE (Ferro Corp) offers an objective add-on or new short entry as the stock is currently backtesting the recently broken 11.85-12.05 former support, now resistance zone. The sole downside price target remains 10.61 with a suggested stop over 12.15. From the current price of 11.94, that provides a very attractive R/R of 6:1.
On the flip-side, I do see some potentially bullish developments, such as positive divergence recently formed on the 60 minute time frame and the fact that FOE has now moved above the Jan 16, 2015 & Oct 15, 2014 reaction lows. My point is not to sound ambiguous on this trade, simply that most of my trades are weighted largely on two related but different factors: Probability of success and the risk/return (R/R) ratio.
From my experience, the trades with the most attractive R/R ratios (about 5:1 and above) will usually have a greater chance of being stopped out than the those with a lower R/R (5.1 -3:1, which is typically the minimum R/R that I look for on a trade). Although trades with above average R/R’s typically have a higher probability of being stopped out, the above average gains, when successful, makes up for the lower probability of success.
Of course, this is a generalization as from time to time, I will come across trade candidates with very attractive R/R profiles as well as a high probability of success. Although the FOE short trade very well may play out, I would have to categorize it in the former (above average R/R, below average chance of success) vs. the latter. With that being said, I would not highlight this backtest if I did not think that a short entry or add-on was worth pointing out for those interesting in adding some short exposure to their portfolio.