Tuesday, October 16, 2007

Risk Management- Revised

I made a post I think about a week ago about risk management and the formula that I like to use. I've been thinking about my trades and I've noticed that I get stopped out on almost every single one. Now, a lot of those stops have saved me from losing even more money but they've also cost me a lot of potential money. For example, getting stopped out just before the stock rallies which has happened to me quite a bit lately.


So, what I'm going to do is very simple. Keep my current formula, but set the stop at a point that's out of the way of the action but not so far away where to the point of it being pointless to trade. A point that clearly confirms and tells me, "hey, this trade is definitely wrong" instead of "hey, this trade could be wrong".


That point will be based on my current trading methods of using Support/Resistance levels on a Daily chart and incorporating them onto an Intra day. I'll see what the action is like on both charts and pin point a stop loss target that I think confirms that the trade is officially wrong. Depending on how far that stop is from the current price, I'll adjust my position size accordingly to my max risk per trade. If the stop is far away, I'll put on a smaller position, if it's closer to the current price, I'll put on a larger size relative to my risk. Basically it's what I've been doing now but really focusing on what a good stop point is instead of a generic automated stop I use for every single trade.


I feel this will help weed out those false stops in which I get stopped before a rally but still keep me relatively safe from potential disaster. Now that I have the plan and what to do, I need to put it into action so it becomes habit.

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