Learning Example:
Active Capital $100,000
Purchase Price $100
Initial Stop $95
Fill Price $101
Trading Cost $10
Target Risk Percent: 1%
Q. What is the Target Risk Amount? What is the Position Size?
A. Target Risk = 1% of $100,000, or $1,000. Position Size = $1,000/(100-95), or 200.
Q. What is the Actual Risk Amount? What should be done about it?
A. Actual Risk = (101 â 95) * 200 = $1200. Since this is greater than the Target Risk Amount, consider raising the Initial Stop to $96.
Initial Stop: $96.
Q. What is the Cost Stop for 20 shares, assuming 3 more sales to follow?
A. Cost is 5x$10 or $50. $50/20 = 2.5, so the Cost Stop price for 20 shares is $103.50.
Assume the Cost Stop was executed as a Limit Order at $103.50.
Q. What are the new 1R and 3R Risk Stop prices for 50 shares? For the entire position?
A. 1R = $1000, so 1000/50 = 20, or $121 for 50 shares. 3R = $3,000, 3000/50 = 60, or $161 for 50 shares. For 1R, 1,000/180 = $5.55, or $106.55 for 180 shares. For 3R, 3000/180 = 16.67, or $117.67 for 180 shares.
Q. If the Initial Stop were $98, what would the 2R for 50 shares be?
A. (101-98)*200 = 600. 600/50 = 12, or $113 Risk Stop price for 50 shares.
Assume sale of 80 shares for $106, leaving 100 shares.
Q. What is the Pure Profit Stop for 80 shares? For 90 shares?
A. We already took profits of $400 (5*80). Selling 80 shares leaves 20 shares at $101, or $2020. 2020-400 = 1620. 1620/80 = $20.25, or $121.25 per share. Selling 90 shares leaves 10 shares or $1010. $1010-400 = 610, 610/90 = 6.78, or $107.78.
Executing the Pure Profit Stop at $107.78 recoups the original capital while keeping 10 shares at $107.78, or about 1R in stock. This amount will eventually be sold using a Closing Stop.
Q. What price achieves a 1R gain for the full position?
A. 1R = $1000. 1000/200 = 5, or $106.
Using the Cost Stop and Pure Profit Stop accomplishes a 1R gain at $107.78 while freeing the original capital, with the initial risk protected at $106.55. A full position strategy has 1R at 106 (but has closed the entire position).
After the Pure Profit Stop, the original capital is ready to invest in a new position while the 10 shares hopefully continue to move upward (with the Closing Stop trailing behind). Additional gains from the 10% may be modest, but the entire position is profit.
___________________________________
Feel free to ask questions or comment on the concepts used in this example.
Chabah
Active Capital $100,000
Purchase Price $100
Initial Stop $95
Fill Price $101
Trading Cost $10
Target Risk Percent: 1%
Q. What is the Target Risk Amount? What is the Position Size?
A. Target Risk = 1% of $100,000, or $1,000. Position Size = $1,000/(100-95), or 200.
Q. What is the Actual Risk Amount? What should be done about it?
A. Actual Risk = (101 â 95) * 200 = $1200. Since this is greater than the Target Risk Amount, consider raising the Initial Stop to $96.
Initial Stop: $96.
Q. What is the Cost Stop for 20 shares, assuming 3 more sales to follow?
A. Cost is 5x$10 or $50. $50/20 = 2.5, so the Cost Stop price for 20 shares is $103.50.
Assume the Cost Stop was executed as a Limit Order at $103.50.
Q. What are the new 1R and 3R Risk Stop prices for 50 shares? For the entire position?
A. 1R = $1000, so 1000/50 = 20, or $121 for 50 shares. 3R = $3,000, 3000/50 = 60, or $161 for 50 shares. For 1R, 1,000/180 = $5.55, or $106.55 for 180 shares. For 3R, 3000/180 = 16.67, or $117.67 for 180 shares.
Q. If the Initial Stop were $98, what would the 2R for 50 shares be?
A. (101-98)*200 = 600. 600/50 = 12, or $113 Risk Stop price for 50 shares.
Assume sale of 80 shares for $106, leaving 100 shares.
Q. What is the Pure Profit Stop for 80 shares? For 90 shares?
A. We already took profits of $400 (5*80). Selling 80 shares leaves 20 shares at $101, or $2020. 2020-400 = 1620. 1620/80 = $20.25, or $121.25 per share. Selling 90 shares leaves 10 shares or $1010. $1010-400 = 610, 610/90 = 6.78, or $107.78.
Executing the Pure Profit Stop at $107.78 recoups the original capital while keeping 10 shares at $107.78, or about 1R in stock. This amount will eventually be sold using a Closing Stop.
Q. What price achieves a 1R gain for the full position?
A. 1R = $1000. 1000/200 = 5, or $106.
Using the Cost Stop and Pure Profit Stop accomplishes a 1R gain at $107.78 while freeing the original capital, with the initial risk protected at $106.55. A full position strategy has 1R at 106 (but has closed the entire position).
After the Pure Profit Stop, the original capital is ready to invest in a new position while the 10 shares hopefully continue to move upward (with the Closing Stop trailing behind). Additional gains from the 10% may be modest, but the entire position is profit.
___________________________________
Feel free to ask questions or comment on the concepts used in this example.
Chabah
