Achilles, So theoretically with my new "Revised" understanding of risk and borrowing from my original example. Assuming I am buying a stock priced @ $1 and during the time I hold it goes up in value to $1.50 wouldn't the math on the below be accurate? Account Balance: $30k 1% Total Risk using 5% stop Actual % Risk = 1% Amount at Risk = $300 6,000x Shares @ $1 Total Value of Position @ Entry = $6000 Value @ Exit = $9000 Potential Profit = $3000 Risk:Reward Ratio = 1:10 Or scaling up on the profitable trade after the trade had moved in my favor enough to move my stop loss to break even I could increase my risk back to 1% and roughly double my position. 1% Total Risk using 5% stop Actual % Risk = 1% Amount at Risk = $300 Total Value of Position @ Entry = $6,000 6,000x Shares @ $1 Total Value of Position After Scaling Up = $12,000 Added additional 5,940 Shares @ $1.01 Total of 11,940x Shares @ Avg of $1.005 Value @ $1.50 Exit = $17,910 Potential Profit = $5,910 Risk:Reward Ratio = 1:10 (Risk never exceeded $300) "Adjusted" Risk:Reward Ratio = 1:19.7 (Final Profit against original risk) Obviously with a small account assuming you weren't using margin you would be limited by your purchasing power, but with risk management isn't the above basically correct? BTW - I am not including accounting for slippage or commissions just to make things easier.
Yes, basically the logic is correct. However, a 5 cent stop is extremely tight... Hitting it twice in a row? Maybe, maybe not. If I were you, I'd first see if I could turn a profit with a 5 or 10 cent stop, single-entry system. If yes, then consider pyramiding. Also bear in mind, this is theory. In practice, with any market, you'll get slippage (in and out) and partial fills + the spread. So a 5 cent stop sounds great on paper. + slippage and spread? Average 7 cents....
I agree on the stop, but while I had someone to double check my work I thought I would keep it simple and get further clarification ;-) Thanks again for the quick responses
No, this is your error; the $300 is the max amount you can lose so that your persent risk remains at 1% or below. How many shares you buy depends on your available bankroll and stop loss. The equations used are very simple. See this reference for example: http://tinyurl.com/2c2gzq6
I was curious about how the new stop price is calculated in a scenario like above where you scale up using some of the profits from a successful trade? Initially in the above scenario the 5% stop was set at $0.95 w/ $300 at risk, but if you almost double the position financed utilizing paper gains, what is the correct way to keep the actual real money risk at $300 or less ? I am just not quite sure how the math is supposed to work.