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Both Free and Paid recommendations in the stock market are available in large numbers. But how many really make trading / investment sense.

As a example, I am taking up this weeks recommendation in Business Line for Nifty.? Near month Nifty Futures closed on Friday @ 2921. Assuming we open at 3000, as per reco, the strategy is to go short with a Stop Loss of 3250. Now, 3250 is 250 points away and we are talking about Nifty which is a leveraged product. Hence the risk in One Contract (50 Lot Size) Rs.12,500.00.

Theoretically, it does not appear large. But thats because we arent calculating the risk with regard to our Capital but instead looking at it only by way of figures.

Money?Management theory says that risk as a percentage should not exceed 2% (if you go by Tharp) or the more generally accepted range of 0.50% of capital to 1.00% of capital.

If we check out the risk?in relation to the above percentages, we?can find that at the highest risk, our Capital should be Rs.6,25,000.00 and at the lowest end, it comes to Rs25,00,000.00 and I am?speaking of One?Nifty Lot.

While No Targets have been provided, lets take the supports that are being given.

Immediate support at around 2750: Profit Margin: 250 Points (1:1 Risk-Reward ratio)

Big crucial support at 2450: Profit Margin: 550 Points (1:2.2 RR Ratio)

Ultimate Suport @ 1880-1950: Profit Margin: 1050 Points (1:4.2 RR Ratio)

While the RR ratio in itself appear satisfactory, it has to be noted that good RR ratio in itself does not mean anything. What we also have to look into is the Return on Equity since that our next main concern (Concern One being Capital Protection)

Immediate support gives us a return of 2% (2% of Equity Stop) and 0.50% (if 0.50% Equity Stop is applied).

Since this is a weekly article and assuming markets does manage to either stop out our positions or provide us the profit oppurtunity, the returns are not that?bad considering the Volatility that exists in the current market. Its just?that our Equity should be able to support venturing into?such a High Risk - High Gain strategy.

Thats it for now

Prashanth