In this post, I want to discuss the most important fundamental of trading, risk management. It's critical to manage risk like a professional, not an amateur. An amateur gives his losing trades "more time to work out", postponing taking the loss, having the loss turn into a big negative hit in their account. A professional realizes that losses are a part of the business and have their risk management strategy well defined and implement it time after time. We have the following risk management strategy:
- Prior to entering a position, know where your stop will be.
a) At the invalidation point
b) No more than 8 ticks for the /NQ, $40 max loss per trade
#1 Rule: ONLY MOVE STOPS ONE WAY, IN THE DIRECTION OF YOUR TRADE
- Once in a position, know what you will do with your stop and when you will do it.
a) After a 3 tick move in your favor, your invalidation point on the 4 range should have increased as well, allowing you to move your stop to the new invalidation point. Normally, we adjust our risk from 2 points to 1 point, once we have a move of 3 ticks in our favor.
b) Once have a move in our favor of over 4 ticks, we like to adjust out stop to 1 tick above entry, ensuring a riskless trade / $5 profit worst case scenario.
Our goal is to have a 1 point move in our favor on every position so that we can eliminate risk on all positions. What we've noticed is that full stops are taken when we take a bad entry signal, being impatient and trading in a ranging market. Therefore, in the next post I will discuss taking good entry signals and attempting to recognize and disregard poor entry signals. We feel there are 2 markets conditions, 1) Moving market, recognizable direction (Participate fully) 2) Ranging market, unrecognizable direction filled with many signals both short and long (Should avoid and not participate in the markets at this time).
I will also explain invalidation points in the next post.
Let me know if you have any questions about this post.
HT
