Peter: You and the more experienced traders on this site will most likely know all the following well and truly, but others like myself, probably not. I thought I would send it on to view the results of what we have spoken about in earlier posts.
You made me do some homework in regards to the distance from the Buy Price to the Initial Stop Loss Price and the different effect it has overall. Below are 12 tables and also another 2 tables over to the right I played around with.
The first 4 tables across the top are a larger priced stock and in this case we will use your $60 stock. All 4 across are with the $60 Buy Price. Table 1 contains the trade with the high price trade you prefer, the $60 stock with a $0.60 iSL, so a Stop Loss @ $59.60
All 4 tables across the middle contain let's say a medium price stock, the AHE trade with the $4.25 Buy Price. Table 5, contains the AHE trade you spoke about with buying at $4.25 with a $0.15 iSL, so a Stop Loss @ $4.10
All 4 tables across the bottom contain a low price stock with a $1.00 Buy Price.
What I wanted to do was put in your high price trade and the AHE trade and also a cheap stock into the tables along with other various stop loss distances away from those buy prices and see what stood out to me. I also wanted to see what happens if the scenario you spoke about if a stock did plunge 15% and the effects that resulted from this event.
All thing were even: The starting bank was $50K, 1% of the bank was risked for each trade which was $500
I looked at your trade No:1 and seen the stop loss was 1% away from the buy price and the total cost of the trade was $50K which I thought confirmed my thoughts of trading larger price stocks was a no-no with a smaller bank, it took up our whole bank if we traded with our $500 risk amount. (Yes, don't worry
I know you're not trading a $50K bank) but I was surprised when I looked at the cheaper No:2 & No:3 tables with the same 1% stop loss and the total cost was $50K as well. The penny drops when you see it front of you then you say, ahhhh of course it would. The same could be seen with the 4 different stop loss levels, 1%, 3.5%, 10% and 15%, it doesn't matter what price the stock it is, it's how close your stop loss is to your buy price is what chews up more of your bank.
Now to the AHE trade No:5 table and your are right when you said the cost total cost was a little over $14K which was 28% of our bank and if it fell 15% it meant we would lose 4% of our bank in 1 hit. In the No:1/2/3 tables with the 1% stop loss I see that it would lose $7,500 or 15% of our bank, which is 15 trades of risk. So once again it seems that the closer our stop loss is to our buy price it increases our total costs, our amounts we lose if the stock falls, and also it increases the number of trade risk lost. 1% loses 15 lots of trade risks, 3.5% loses 4.25, 10% loses 1.5 and 15% loses 1 trade risk.
In the top right of each table 1 - 12 in the blue cells I've divided our starting bank by the different amount of trades in our portfolio giving an average cost of each trade. No big deal but I just put it in there for my viewing.
The last 2 tables on the right side with the black headers and yellow arrow (Maximum - S/L - Minimum) I have put in stop loss level s away from the buy prices of 7% & 15%. I see that the 15% will only lose 1 trade risk if the share price drops 15% which makes sense and the 7% will lose a little over 2 lots of trade risk. I also noticed if your stop loss % was the same for every trade (which is impossible for this type of trading) and you divided your bank by the same number it would equal the total cost of each trade. I think I remember Tech/a saying something about he found between 8%- 12% was the sweet spot and now after this I tend to agree with him. Between 7% - 15% enables you to split your bank up into quite a few stock and at the same time reduces the impact if some stocks drop by 15%.
Like I said before, maybe nothing new for experienced traders but I thought I'd pass it on anyway.