Page 401 - THE MARKET WHISPERER

THE MARKET WHISPERER 39 7
Aon Daily Chart, AON

If we examine the stock over several days and concentrate on the black
(down) candles by checking the height of the candle from end to end
including tails, we see that the intraday trading range in Aon at the marked
points [1,2,3] is around $1.50 between the highest and lowest prices. If you
really want to, you can translate the outcomes from points to percentages:
the daily volatility is some 3%. Looking at the last few trading days, I can
see that Aon had some less volatile days, and I can therefore carefully
estimate with reasonable expectation an intraday fluctuation of $1.

Now I return to the intraday chart and see that Aon’s high is $39.44,
which is a difference of some 30 cents between the intraday high and the
planned entry point [1]. Conclusion: based on a check of past volatility, we
can reasonably assume that Aon is able to move another 70 cents or so
below the breakdown price. Since the risk is 20 cents and the profit target
is 70 cents, the risk to reward ratio is 1:3.5. Very decent! In actuality, as you
have seen, the stock moved 82 cents, a little more than the expected figure.
I executed a careful short of 1000 shares, added another 1000 at the start
of the fall, and locked in several pieces of profit on the way down. In short,
I risked $300 but profited $752.05.