ABB Stock Market Trading continued, Proper comparison

Rather than add to one of the previous posts, here is a note on comparing one trade size to another followed by a bit about account size and trade determination.

My initial simple trading plan included trading at least one lot (100 shares) of a stock. This produced a particular return, profit or loss.

Adding levels of complexity that introduces additional concurrent trades or splits up the initial trade make it a little bit more complicated to compare one against the other. At least on a dollar for dollar basis.

In the first plan I trade one lot, 100 shares bought, 100 shares sold at target or at stop loss. In the second plan it is the same entry but the first 50 shares get sold at target and the second get the VTSO treatment, or the whole lot stops out and is sold for my Maximum Loss Allowance (MLA) for that trade.

Easy enough.

In the subsequent alterations the entry trades go from the above guide to one entry at the initial target, perhaps a second and perhaps a third at subsequent targets. The farther along in the sequence the more shares traded due to the second and third possible trades. Cutting the altered trade sizing to 1/3 lots or tripling the initial plan isn't a fair comparison as many of the second entries do not set up and even fewer of the thirds. Then again, counting three trades with a combined size of 300 shares is not fair to the initial plan only using 100 shares.

It boils down to a subjective assessment of the win rates and returns that fit a particular account size and applying appropriate money management rules to determine which style fits both the account and the risk tolerance of the individual. This should be completed up front and in writing in order to have a guide to stick to. Making these up and the fly is not a great idea and can lead to problems later on, although not necessarily with a successful and profitable plan.

Here are two particular examples for an attempt at comparison, ABB at around $14 in the middle of 2009.

Simple trade plan, 100 shares in and all out at targets.Typical initial target is for $1.50 but how much of that is aimed for depends upon the price movement following the entry.

Buy at $14, sell at $15. $1 per share = $100 gain (7.1%)

VTSO applied with $1.50 trailing stop, 100 shares in, 50 shares out at target, 50 shares to trail.

Buy at $14, sell 50 at $15 and sell 50 at $17.50. $1 ps + $3.50 ps = $225 gain (16.1%)

Multiple entries and exits according to the final plan setup.

Buy at $14, sell 50 at $15 and sell 50 at $17.50. $1 ps + $3.50 ps = $225 gain (16.1%)
Buy at $13.50, sell 50 at $15 and sell 50 at $17.50. $1.50 ps + $4 ps = $275 gain (20.4%)
Buy at $13.00, sell 50 at $15 and sell 50 at $17.50. $2 ps + $4.50 ps = $325 gain (25%)
Total gain = $825 (20.3%)

Worst case loss for the respective plans:

Simple trade plan, 100 shares in and all out at stop loss.

Buy at $14, stop loss at $12.50. $1.50 per share = $150 loss (10.7%)

VTSO applied does not matter as the initial stop is always $1.50 on this priced stock, same loss.

Multiple entries and respective stops assuming the worst case according to the final plan setup.

Buy at $14, stop at $12.50. $1.50 per share = $150 loss (10.7%)
Buy at $13.50, stop at $12. $1.50 per share = $150 loss (11.1%)
Buy at $13.00, stop $11.5. $1.50 per share = $150 loss (11.5%)
Total loss = $450 (11.1%)

Keeping the worst case scenario in mind and using the typical account loss allowance of no more than 2% Maximum Loss Allowance on any single trade, this trade alone would require an account balance of $22,500 even though the trade only used $4050 in capital. Going with the smaller 100 share trades and keeping to the simpler single entry and VTSO half trade exit, the account could be $7,500.Of course these assume that this is the only trade on the map.

I'm breaking this into another post, again due to the length and this is a good place to break as the topic is shifting a bit.

Based on the numbers that I am looking at now, I think that the best comparison may just be no direct comparison and to consider the account and go from there. Starting with a small account may mean restriction to initial entries only and perhaps targeting lower priced stocks. Adding more stocks to the mix as the account grows then adding the second trade setups and thirds will allow the account and methods used to grow accordingly.

The win rate and overall returns will govern where I think the money is best applied which leads me into the more complex trades. Ideally taking every trade setup as it appears and making every trade at every level is the best overall action for this trading plan, it just may not work for everyone.

Jeff.