Understanding the Risk of Ruin is, of course, paramount in trading. You "gotta leave enough to trade another day" as they say. Don
I don't know if it was an option in the poll, I just don't know the name of this method. Price: $50 Stop loss below support 49.50 Amount of risk: 0.50 (Not including slippage, if any) Max amount I feel comfortable losing: $1000.00 0.50 * $1000.00 = 500 shares. Is there a name for this method?
As Don pointed out, you are not doing it right... need to divide, not multiply, total risk by per-share risk: $1000 / $0.50 = 2000 shares. The smaller your stop loss and the larger your max $ risk, the more shares you could trade. Done this way, this would fall under poll option 2, Fixed Risk.
Applying stop-losses So many of my learned peers support the theory of tight stop-loss methods when investing or trading. This seems to make perfect sense on the surface, but look a bit deeper. If you buy 100 shares of stock at $50, and hope to get an annual return on investment (Roi) of 12%, the stock would have to rise by $6 annually (assuming there were no dividends paid). To protect yourself from ruin, you can enter an initial stop-loss sell order to trigger at a predetermined price. How much should you limit your loss? How does this individual stock movement affect your overall portfolio? Rather than go down the mundane road of percentage calculations based on overall bankroll (portfolio), standard deviation of historical volatility per stock/sector, and the whole number-crunching approach to what might happen if the stock were to move x percent over a t time frame, letâs take a more universal and, yes, much simpler approach. If you didn't get a chance to read the whole thing yet, if interested, this goes into risk control more from a trading perspective than investing. http://www.stocktrading.com/riskreward2.html Don