Quote:
Originally Posted by lewdog
The initial stop I set is a hard stop set at a certain price determined by the stocks recent low's before a possible trade initiation. In this case the buy price was 58.20 and the initial stop was set at 56.60 for 2.7% risk. This stop is raised if the stock continues to go up but is then determined by it's new movement, and many times set at intraday low's, so the percentage only matters for initiating the trade. It has no meaning after the stock moves up as the goal is to maintain capital and decrease downside risk. Today the intraday low was 56.98. Instead of targeting the exact intraday low I take that price and multiply it by .999 to set my new stop loss right below the intraday low. So this would be 56.98 x .999 = 56.92. I am now at 2.2% risk compared to my purchase price.
If you can build in capital risk management strategies by using defined rules, with a win/loss ratio of 2:1 (8% winners, 4% losers on average), this system still provides profit even if you're only 50% accurate in your trades. It's called "built in failure." This also only works if you track every trade so you know how successful you are doing in your trading. Most investors subconsciously lie to themselves about how successful they are at "winning" trades.
When the market was whip-sawing in March-April, many of my trades were 3-4% winners, while I was able to tighten up my stop losses to 1.6-2%. I was still able to maintain a 2:1 ratio of winners to losers and made profit even though my trading winning percentage was only 47% those months.
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Gotcha. Thanks for the explanation.