Now, say you plan to trade System 3 (Figure 2.3). Using the equal-dollar
position method, you might have decided to always tie up $100,000 in each trade
to catch a 2-percent move (on average) in every stock you’re interested in. If, for
example, a stock is priced at $50, a 2-percent move on a one-share basis will be
worth $1. Tying up $100,000 in a $50 stock means you can buy 2,000 shares, for
a total estimated profit of $2,000 (50 * 0.02 * 2,000), which also is 2 percent of
$100,000 (2,000 / 100,000).
Using the one-share percentage method, the average profit per trade in the
future will equal the average percentage move the system is expected to catch,
multiplied by the current stock price of each specific stock, multiplied by the
number of shares invested in each specific trade. For example, if the average prof-
it per trade is expected to be 2 percent per share, the price of the stock is $100, and
you plan to buy 1,000 shares, the expected profit will come out to $2,000 per trade
(100 * 0.02 *1,000). Buying 1,000 shares of a $100 stock also means that you will
tie up $100,000, for a total percentage profit of 2 percent of the invested amount.
Note that in the first case, your plan is to tie up a certain dollar amount; in
the second example, it is to buy a fixed amount of shares. In real trading, none of
these methods are the preferred ways to go. Instead, you should always try to risk
the same percentage amount of your equity, which will alter both the number ofCHAPTER 2 Calculating Profit 19
FIGURE 2.3
System 3 distribution of trades and profits.