Money and Risk management part 3

The result without profit and loss sharing

There were on average 25 trades per stock during the whole of the period.
The total profit is $265,356.

Figure 9.3: Test result without profit and loss sharing.

ATTENTION: the %gain indication in the results table (figure 9.3) is in relation to the starting capital of each stock ($1,250)!

The final profit has more than doubled.

Trading a selection of a limited number of stocks and not sharing profits or losses is the better choice!

Risk management

Once a buying order is executed, you must limit the risk keeping an initial stop. The initial stop itself is variable from trade to trade because it will be based on different technical analysis techniques.

Special offer: "Capturing Profit with technical Analysis"

On the other hand you must use a trailing stop as the ultimate selling signal to avoid that too much profit would be lost.

And of course you must apply the money management technique as explained in the previous paragraph.

Initial Stop

Look in the "Capturing Profit with Technical Analysis" book for the  MetaStock® formula creating an initial and trailing stop on the price chart from an entry date and techniques to use for setting an initial and a trailing stop.

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Risk/Reward ratio

Limiting the possible loss in a trade is probably the most important factor considering a new position. Assume that of all trades 50% are winning trades and 50% are losing trades. If the average loss would be 15%, we would have to make an average profit of 25% on winning trades to end up with a final profit of only 10%. Not to forget that a 25% up move in a stock is already a big move, it will not be easy to make profits!
 
If on the other hand, we would suffer a loss of only 5% on a losing trade, we have to make a limited 15% profit on winning trades to end up with a 10% profit. Basically this is much easier, since smaller moves are more common. At the opening of a position the risk/reward ratio should be minimum 1 to 3.

Read the whole story in "Capturing Profit with Technical Analysis".

 

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