Question about risk of average trade.

[Aston01]

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.

 

[achilles28]

Quote from Aston01:

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
11,940x Shares @ Avg of $1.005

Value @ $1.50 Exit = $17,910
Potential Profit = $5,850
Risk:Reward Ratio = 1:10 (Risk never exceeded $300)
"Adjusted" Risk:Reward Ratio = 1:19.5 (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?

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....

 

[Aston01]

Quote from achilles28:

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.

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

 

[achilles28]

No problem

 

[intradaybill]

Quote from Aston01:

I assume most people think about it the way I did and figured if you have a $30k account then you should stick with buying $300 worth of whatever you are trading.

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

 

[Aston01]

Scaling up on a profitable trade after the trade has 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)

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.