Would like to stress the point, that the 3rd buy is the key to capital preservation. This is the reason I found +/-10% the 3rd time is so important. That being 10%, not another 5%, is what hedges the first 2 buys.
Lets see if I can explain what could happen, if the play goes south.
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Look at original post;
1st buy $1.00: profit sell $1.25 / loss sell $.88
2nd buy +5% from 1st at $1.05: profit sell $1.31 / loss sell $.92
Now the 3rd buy will take place +/- 10% from the 2nd at $1.05.
So The entry point for the 3rd buy would be $1.16 or $.94.
When it hits $1.16 or $.94 I buy the 3rd entry.
If buy is at $1.16 profit sell would be +25% $1.49 Or sell loss -12.5% $1.01
If the 3rd buy is at $.94 profit sell would be +25% $1.17 Or sell loss -12.5% $.83.
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Lets say we were wrong and the stock was not going to rise 25% and it started going the wrong way. External reasons?? For what ever reason.
We have sell loss targets for the 1st two buys at $.92 for 2nd and $.88 for first. The price dives and the 3rd buy is at $.94.
At the pivot point now. If something happens to reverse the dive, nothing closes at loss targets. you'll start looking for the 4th buy at +/- 5% from the 3rd buy at .94 or $.99 (+5%)& $.89 (-5%).
So at this point we would have 3 entries. $1.00, $1.05, And a negative move to $.94, all still open.
The forth buy would create a complete $4,000 entry. But to be honest, is rarely closed with the stock in a down move.
Continuing south would close the 2nd buy at $.92, 12.5% loss, if made in a negative move to .89, close of 3rd buy and hedge any reversal for the 1st loss target at $.88, which normally closes also, creating (2) 12.5% on $2k or(total 25% on $1k) losses and the 3rd position open, at .89, which can reap 25% profit gain, if a reversal comes. Keeps you in the game. And will wash the 1st 2 losses with one win.
Continued down move, ends with a max loss of 3/4ths the total loss, the forth entry rarely closes in a down trend, because by then, the 1st, 2nd, & 3rd, sell loss targets are reached or well in sight, to keep you from continuing to bet on a loosing play. You need the reversal after the first 2 losses, or you except the 3rd loss also and move on.
I guess you could say, I should change the last variable (4th entry) to +5% only. Because I rarely continue to buy, if all 3 entries are losses or looking like the 3rd will also loose. But could if some out side factor makes me think a reversal after the 3rd loss should be hedged. Not likely, but an option, built into the plan, with the last -5% remaining. So I'll keep +/_5% for the 4th entry, optional. LOL
Many variables, depending on which direction the price moves from the first $1.00 entry. You can do a "what if" thing all the way out from each decision point.
And at the end, you'll find, if you were correct to enter, you will get a total of 25% profits, on the total $4,000, in 4 buys. Matters not where the buys were made down 5%/10% or up or a combo. As long as it doesn't lower enough to close a sell loss target and profit targets reached in an up trend.
But if you were wrong, you will loose less then 12.5% of the total $4,000. Because of moving out at loss targets, in the down trend.