Rise
About a year ago, I ran this scenario through an Excel @Risk spreadsheet program. I did 10000 iterations on the above scenario and if my memory serves me correctly, the expected outcome would be an increase in your initial $1,000.00 investment to approximately $234,000 for every twenty trades you made
I think everyone does this type of calculation when they first start playing stocks. The "what if I had margined everything I had on BII at $3 and sold right at the top...WOW - $5,000,000). However there are a few big problems with the above statement.
1. You are risking all you capital on every trade. One halt and huge gap down near the start of the iteration and you are whipped out for good.
2. Unless you are an amazing stock picker, for every stock you pick that goes up 50% and sell you are going to have several stocks that go down 20%. Now what happens when you pick 4 losers in a row. Of course this is assuming that you have the strong conviction to cut ALL losses at 20% and not let one get away from you while you pray for a rebound.
$10,000
to $8000 (loss)
to $6400 (loss)
to $5120 (loss)
to $4100 (loss)
At this point you will need three 50% gains just to get back to even which is highly unlikely unless your are John, Ed or Lola.
The one thing I think I have learned over the years when playing stocks is to let the profits run until they can't run anymore and cut you losses as quick as possible and not look back. If you have a 50% gain put a stop loss to lock in X% of your gains...if it goes to 100% gain bump up the stop loss again...etc., etc.,. If you read any books like Market Wizards, etc. most successful traders will tell you that they got rich by several large wins instead of just a bunch of small ones that compounded.
Best Regards
KEITH |
