Risk Management

I have day traded for over a year and a half and have learned in this period of my life the value of planning. When the market teaches you a lesson it can hurt both mentally and financially. It is imperative that a plan be determined before trading any asset. When entering and exiting trades, there should be an explainable logic which follows those actions and not some emotional concept about any trade or asset. Every trade incurs risk and so a probability of loss exists in every trade.

I determine my loss at the chart:

  • 1) Determine where to enter the trade
  • 2) Determine trade size
  • 3) Determine Trade management for risk (where to cut the trade)
  • 4) Determine Take Profit

Entering Trades: I typically use charting metrics to determine my initial entry. With this in mind, I determine ahead of time the areas of interest that I perceive as viable turning points for the price action trends (reversals).

Trade Sizing: Sizing trades is still at times difficult to determine given that assets vary heavily in many ways. I size according to risk. I determine ahead of time that the trade can go ‘A’ amount against the position and has the capability if managed properly to realize profits of ‘B’ amount. Risk must be accounted for by equal or greater profits over time. The difficulty with these parameters primarily revolve around the traders’ ability to cut at a loss willingly according to the plan. Another complication can arise when new data is presented or unexpected results come about. Discretion is still valuable, I do use it, but is not inherently emotional. Generally speaking, when in doubt, cut it! Emotion is never a reason to trade, explainable logic is!

Trade Management: Trade management can be difficult to devise at first but with a trained mind and a plan set ahead of time, trade management can be simplified somewhat. Cycling shares can bring your price closer to the end of a move while also reducing risk exposure at the same time. Cycling shares can also be utilized when exiting a failing position. Exiting with small losses and re-approaching to ensure a better average price seems complex and can actually be a catalyst for emotional responses. To cycle shares when a position is moving against you might go against your instincts and willingly overcoming this can be difficult. Although challenging for some to pull off successfully, cycling shares can be a valuable tool under the traders belt. Learn more about Cycling Shares.

Taking Profit: Assets vary and so should the price determined for profit taking. This price for my trades varies even during a trade. The market is dynamic and ever changing and thus should be the ‘take profit’. On entry, I have already determined a viable point by which I am willing to take profits, however, this changes over time. If I adjust for risk in a position, which depends upon the current price actions of the traded asset, I must at times change my ‘take profit’. This is not always the case, but I do plan for this. Other considerations: Does the profit account for or overcome the risk on the trade? Do my gains on average account for the losses I accrue over time?

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