Kevin_in_GA
4,599 posts
msg #117869
- Ignore Kevin_in_GA |
1/23/2014 11:10:06 AM
We'll use two actual $4.00 stocks, but we will use the ATR(20) as our stop loss rather than a set percentage. For ZNGA the ATR(20) is 0.13, and for CSVN the ATR(20) is 0.45. You can immediately see that if we used a standard 5% stop on both of these, the risk of tripping the stop loss for CSVN is much higher than for ZNGA. So to hold our loss at $1000, we need to customize the number of shares and stop loss position for each stock, rather than just use a set percentage based on the amount of the trade. Rather, the amount of the trade is varied based on the volatility of the stock.
Example
ZNGA :
the absolute amount willing to lose = $1000
the absolute drop in value = 1 x ATR(20) or $0.13
the number of shares to purchase = 1000/0.13 = 7692 shares with a stop loss at ($4.00 - $0.13) = $3.87.
total amount in this trade = 7692 x $4.00 = $30,768
The stop loss is at 3.87, not at 3.00
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