Risk Management Example
As demonstrated by the table below, the key to profitability is to strictly limit losses on each trade by between 5 to 8% - and compound the portfolio. The table shows the results of 30 hypothetical stock trades with a stop loss limit of 8% for every losing trade and a modest 12% gain for winning trades. The end result is a total gain of 56% on a hypothetical $10,000 portfolio (Pre-tax). It also shows that even if you are wrong more than 50% of the time, if you keep your losses minimal, you will still come out ahead.
Illustration of Stop Loss at -8%
Starting Balance: $10000
| |
Trade %
Gain/Loss |
Trade Value
Gain/Loss |
Portfolio
Value |
Cumulative
Gains |
| Trade 1 | -8% | $-800.00 | $9200.00 | $-800.00 | | Trade 2 | 12% | $1104.00 | $10304.00 | $304.00 | | Trade 3 | -8% | $-824.32 | $9479.68 | $-520.32 | | Trade 4 | 12% | $1137.56 | $10617.24 | $617.24 | | Trade 5 | -8% | $-849.38 | $9767.86 | $-232.14 | | Trade 6 | 12% | $1172.14 | $10940.00 | $940.00 | | Trade 7 | -8% | $-875.20 | $10064.80 | $64.80 | | Trade 8 | 12% | $1207.78 | $11272.58 | $1272.58 | | Trade 9 | -8% | $-901.81 | $10370.77 | $370.77 | | Trade 10 | 12% | $1244.49 | $11615.26 | $1615.26 | | Trade 11 | -8% | $-929.22 | $10686.04 | $686.04 | | Trade 12 | 12% | $1282.32 | $11968.36 | $1968.36 | | Trade 13 | -8% | $-957.47 | $11010.89 | $1010.89 | | Trade 14 | 12% | $1321.31 | $12332.20 | $2332.20 | | Trade 15 | -8% | $-986.58 | $11345.62 | $1345.62 | | Trade 16 | 12% | $1361.47 | $12707.09 | $2707.09 | | Trade 17 | -8% | $-1016.57 | $11690.52 | $1690.52 | | Trade 18 | 12% | $1402.86 | $13093.38 | $3093.38 | | Trade 19 | -8% | $-1047.47 | $12045.91 | $2045.91 | | Trade 20 | 12% | $1445.51 | $13491.42 | $3491.42 | | Trade 21 | -8% | $-1079.31 | $12412.11 | $2412.11 | | Trade 22 | 12% | $1489.45 | $13901.56 | $3901.56 | | Trade 23 | -8% | $-1112.12 | $12789.44 | $2789.44 | | Trade 24 | 12% | $1534.73 | $14324.17 | $4324.17 | | Trade 25 | -8% | $-1145.93 | $13178.24 | $3178.24 | | Trade 26 | 12% | $1581.39 | $14759.63 | $4759.63 | | Trade 27 | -8% | $-1180.77 | $13578.86 | $3578.86 | | Trade 28 | 12% | $1629.46 | $15208.32 | $5208.32 | | Trade 29 | -8% | $-1216.67 | $13991.65 | $3991.65 | | Trade 30 | 12% | $1679.00 | $15670.65 | $5670.65 |
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Analysis
Beginning Balance: $10000
Net Gain: $5670.65
Percent Return: 56.71%
Try new values:
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