One stock has a 69% upside potential, while another has a 77.3% downside risk. Should you follow the trend and chase the强者 (strong performers), or bet on a rebound from weak stocks?
If two stocks were placed in front of you:
One has been rising consistently recently.
One has been falling consistently recently.
Which one would you buy?
Many retail investors typically have two initial reactions.
The first: "The strong stay strong, so definitely chase the momentum."
The second: "It's dropped so much, definitely buy the cheaper one."
The problem is that both approaches can actually lead to losses.
It’s quite interesting to use Zijin Mining and AIA as examples today.
Zijin closed today at 35.92 yuan, up 1.53%。
Looking at a slightly longer timeframe:
– 5 days: +2.05%
– 10 days: +9.85%
– 20 days: +20.88%
– 250 days: +72.21%
Today, net inflows from major institutional funds amounted to approximately RMB 76.83 million。
This indicates that the trend is clearly strong in both the short and medium term.
The upside risk-reward ratio we calculated is approximately 69%。
However, this 69% does not mean there is a "69% chance it will definitely rise".
This point must be clarified.
It simply means that, after comparing current data on trends, capital flows, and price levels, Zijin Mining currently has relatively complete conditions for an upward move.
But the biggest issue with strong stocks is always: Will you chase at the highest price?
Zijin Mining hit a high of HKD 36.30Low at 35.12.
Currently at 35.92.
So if you are bullish, I wouldn't chase the price just because the risk-reward ratio is high.
A high risk-reward ratio only indicates that the directional conditions are relatively favorable.
It does not mean that any price is worth buying at.
If you are trading call options or bull contracts, there is one thing I would prioritize even more:
How far is the underlying stock from its support level?
Since the product itself already has leverage, entering at a poor price for the underlying stock effectively stacks two layers of risk.
AIA closed today at HK$72.65,。
with a daily decline of only 0.27%, which looks quite ordinary.
However:
– 5-day: -6.56%
– 10-day: -7.04%
– 20-day: -4.66%
– 60-day: -15.68%
Therefore, its short-to-medium term technical structure is clearly weaker than that of Zijin Mining.
The calculated risk-reward ratio for the downside is approximately 77.3%。
Would you immediately buy a put option just because it's at 77.3%?
You still shouldn't.
Because AIA hit a low of HKD 71.55 today,and closed back at 72.65.
In other words, the stock price is already testing a relatively lower level.
If buying support emerges around 71.5, there could be a short-term rebound even if the medium-term trend remains weak.
So even when bearish, don't forget about entry levels.
So, should you follow the trend and chase Zijin Mining, or buy the dip on AIA?
I would first clarify what type of trading you are doing.
If you want to trade with the trend,
Zijin Mining is naturally the more reasonable choice.
Because you don't need to bet on a trend reversal that hasn't appeared yet.
You simply accept:
The current momentum is strong, so as long as support holds, I will continue to follow the strength.
The biggest risk in this strategy isn't getting the direction wrong, but chasing at too high a price.
If you want to bet on a rebound,
you should wait for evidence with AIA.
Don't buy just because it dropped 7%.
Instead, look for signs like holding steady around 71.5 and reclaiming certain short-term resistance levels, which would prove that selling pressure is starting to ease.
Otherwise, "buying the dip" can easily turn into:
The trend is clearly declining, yet you keep saying it has fallen enough.
The true purpose of the risk-reward ratio is not to help you pick an answer,
but rather to serve as a measuring stick.
Zijin Mining's upside risk-reward ratio is 69%, indicating that the conditions for upward movement are currently more complete.
AIA's downside risk-reward ratio is 77.3%, suggesting that the conditions for downward movement are currently more pronounced.
However, you still need to factor in:
– Current price level
– Support and resistance levels
– Product leverage
- Distance to Call Price
- IV
- Time value
- Your acceptable stop-loss level
Therefore, we never present the risk-reward ratio as a guaranteed winning formula.
Such a thing simply does not exist in the market.
Some traders rely on chart patterns, others use RSI, and some watch Bollinger Bands. We simply try to aggregate more diverse data points to provide a stronger basis for our projections.
If I had to choose the easier trade to execute between these two stocks today, I would lean towards:
Waiting for Zijin Mining to return to a more reasonable level before trading with the trend, rather than simply buying the dip because AIA has dropped significantly.
The reason is not that Zijin Mining is guaranteed to rise.
It is simply that there are fewer assumptions you need to make at present.
Zijin Mining just needs the "current trend to continue."
AIA, on the other hand, needs the "current downtrend to stop and a rebound to begin."
In investing, having one fewer assumption can sometimes make a huge difference.
Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
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