Maximize Profits and Minimize Risk: My Stock Playbook

On May 7, I made a bold move and bought Amazon Inc. (AMZN) stock at $189. Why? Because the price kept rising after the earnings release—a very good sign. But how did I manage my risk and set my profit targets? Let’s dive into the details.

Why I Bought AMZN Stock

After the earnings release, Amazon’s stock price continued its upward trend. This movement indicated strong performance and future potential. I saw this as an opportunity to capitalize on the momentum.

The earnings report showed solid revenue growth and beating analysts’ expectations. Investors were clearly excited, driving the stock price higher. I noticed the volume on up days was significantly higher, which is a bullish signal.

And who doesn’t want to invest in a company that’s doing well? Amazon’s diverse business model, from e-commerce to cloud computing, provides multiple revenue streams. This diversity reduces risk and supports long-term growth.

Another factor was the positive market sentiment. Analysts were upgrading their price targets, and news outlets were buzzing with optimism about Amazon’s future. This positive buzz created a favorable environment for the stock.

Additionally, institutional investors were increasing their positions. When big players show confidence, it’s a good sign. Their involvement often leads to more stability and less volatility in the stock price.

So, why did I buy AMZN stock? Because it was a well-timed opportunity backed by solid earnings, strong market sentiment, and increased institutional investment. It was a strategic move to leverage Amazon’s ongoing success and growth potential.

Managing Risk with a Tight Stop-Loss

I set my stop-loss at $179.97. This tight stop-loss translates to a 4.75% risk on the position. Why so tight? The stock wasn’t breaking out of a base, which added an extra layer of risk.

Setting a tight stop-loss is crucial when there’s uncertainty. By keeping the stop-loss close, I limit potential losses if the stock price drops unexpectedly. It’s a protective measure to safeguard my portfolio from significant downturns.

And let’s face it, nobody likes losing money. A tight stop-loss ensures that if the trade goes south, I can exit quickly with minimal damage. This approach keeps my losses small and manageable, allowing me to stay in the game for the next opportunity.

By using a tight stop-loss, I balance the need for profit with the necessity of protection. It’s all about staying cautious and being prepared for any market movement.

Setting a Bold Profit Target

My profit target was ambitious—$226.80. This means I was aiming for a 20% profit. Not too shabby, right? If the stock hit this target, the rewards would be well worth the risk.

Why aim so high? Amazon has a strong track record of growth and innovation. Their consistent performance made me confident in setting a higher profit target. By aiming for $226.80, I positioned myself to maximize gains from a company with proven potential.

And who doesn’t love a good profit? Setting an ambitious target motivates me to stay focused and patient. It’s about playing the long game and not settling for small wins. With Amazon’s upward trend and solid fundamentals, the target seemed achievable.

A bold profit target also helps balance the tight stop-loss. While the stop-loss protects against losses, the high profit target ensures that when things go right, the rewards are substantial. This strategy creates a healthy risk-reward ratio, making the trade worthwhile.

The Risk-Reward Ratio

This strategy resulted in a risk-reward ratio of 0.24, or about 1 to 4. For every dollar I risked, I aimed to gain four. Sounds like a good deal?

A favorable risk-reward ratio is essential for successful trading. By aiming for a higher reward relative to the risk, I ensure that my potential gains significantly outweigh my potential losses. This ratio helps maintain a balanced approach, allowing for profitability even if not all trades are winners.

Relative Strength and Industry Rank

At the time of purchase, AMZN had a Relative Strength (RS) rating of 90. It outperformed 90% of the stocks in the market. However, its industry rank was 90 out of 197, not exactly a leader. This posed a risk, but being AMZN, a stock owned by many institutions, mitigated some of that risk.

Position Size and Portfolio Impact

The position size was 8.6% of my overall portfolio. This means the position risk relative to my portfolio was 0.41%. If the position hit the stop-loss, I’d lose about 0.4% of my portfolio’s value. Not a huge blow, but significant enough to be cautious.

Details at a Glance

Explanations for the Drawing

The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.

Green Line 21-day exponential moving average line (see EMA 21 below)

Red Line 50-day simple moving average line (see SMA 50 below)

Black Line 200-day simple moving average line (see SMA 200 below)

As you can see again, the stock had been risen for quite a while before I made a purchase. Buying that high takes some courage but in actuality it’s less risky than buying low.

  • Underlying: AMZN
  • Date: May 7, 2024
  • Underlying Price: $189.00
  • Stop Loss: $179.97
  • Position Risk: 4.75%
  • Position Risk to Portfolio: 0.41%
  • Profit Target: $226.80
  • Potential Profit: 19.89%
  • Risk to Reward Ratio: 0.24
  • Market Outlook: Confirmed uptrend
  • RS Rating: 90
  • Industry Rank: 91/197
  • Volume U/D Ratio: 1.3
  • Institutional Ownership Trend: Up
  • Position Size: 8.6%

Terms and Definitions

  • Stop-Loss: A preset level where the stock is sold to prevent further losses.
  • Profit Target: The price level at which the stock is sold to realize profits.
  • Risk-Reward Ratio: The ratio of potential profit to potential loss.
  • RS Rating: A measure of a stock’s performance relative to other stocks.
  • Industry Rank: The stock’s rank within its industry based on performance.
  • Volume U/D Ratio: The ratio of volume on up days to down days, indicating buying/selling pressure.
  • Institutional Ownership Trend: The trend of institutional investors buying or selling the stock.

Conclusion

And there you have it—a detailed breakdown of my AMZN stock purchase. Was it an ideal buy? Maybe not, as the stock wasn’t breaking out of a base. But with careful risk management and a clear profit target, I made a calculated decision.

Final Thought

Remember, in the stock market, sometimes you win, and sometimes you learn.

One more thing: if you have any thoughts or questions, fill out the form here and I’ll get back to you.

About the author

Victor

I am an online persona dedicated to learning stock trading. I consistently seek new opportunities to strengthen my portfolio while effectively managing risk.

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