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    Manage: For Trading Longevity

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    Regardless of the type of trader, all must take calculated risks to make money in the markets. Managing risk is key to success as both large gains and losses are possible. It is important to understand where a trade could go wrong by identifying stop-loss levels and having a plan to adjust if market conditions change unexpectedly. Traders should also avoid letting their ego influence decisions and should recognize when they are mistaken to avoid poor trades.

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    Manage: For Trading Longevity

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    TraderLibrary
    390 views4 pages
    Regardless of the type of trader, all must take calculated risks to make money in the markets. Managing risk is key to success as both large gains and losses are possible. It is important to understand where a trade could go wrong by identifying stop-loss levels and having a plan to adjust if market conditions change unexpectedly. Traders should also avoid letting their ego influence decisions and should recognize when they are mistaken to avoid poor trades.

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    Regardless of the type of trader, all must take calculated risks to make money in the markets. Managing risk is key to success as both large gains and losses are possible. It is important to understand where a trade could go wrong by identifying stop-loss levels and having a plan to adjust if market conditions change unexpectedly. Traders should also avoid letting their ego influence decisions and should recognize when they are mistaken to avoid poor trades.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    390 views4 pages

    Manage: For Trading Longevity

    Uploaded by

    TraderLibrary
    Regardless of the type of trader, all must take calculated risks to make money in the markets. Managing risk is key to success as both large gains and losses are possible. It is important to understand where a trade could go wrong by identifying stop-loss levels and having a plan to adjust if market conditions change unexpectedly. Traders should also avoid letting their ego influence decisions and should recognize when they are mistaken to avoid poor trades.

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    of 4

    RISK

    Institutional, retail, trend, swing, technical or fundamental


    regardless of what type of trader is at the other end of the mouse,
    we all must take calculated risks to make money in the market.
    MANAGE
    FOR TRADI NG LONGEVI T Y
    B
    y

    T
    o
    m

    B
    u
    s
    b
    y
    Some risks pay off in
    rewards, and others are
    realized through losses.
    Having been deeply
    involved in the finan-
    cial markets for nearly
    30 years, I have had the
    opportunity of seeing
    just about every method,
    system and trading tool
    out there. From the CEO
    of a major Wall Street
    firm to the individual
    trader managing his
    own money, success
    boils down to how you
    manage risk.
    Without an under-
    standing of the risks in
    the market, traders are
    unprepared for the unex-
    pected. What to ask be-
    fore placing a trade:
    WhereamIvrong?
    IovmuchamIrIskIng
    loreachmylargel?
    WhallypesoIadjusl-
    ments can I make if a
    gamechangeroccurs?
    KEEP EGO OUT OF IT
    Repeat after me I am
    not the smartest person
    in the world. Say that
    again three times, and
    you will be on your way
    to becoming a better
    trader already. As soon
    as ego gets in the way
    of a trade, the blinders
    go up, and the account
    balance goes down. It is
    important to believe in a
    trade and have convic-
    tion, but not to the point
    of no return.
    I have learned to rec-
    ognize where and when I
    am wrong.
    WHERE ARE
    YOU WRONG?
    By understanding that
    you are not the smartest
    person in the world, you
    will be able to see when
    a great trade setup might
    actually be a bad trade
    setup. It may be a great
    trade setup, but news or
    some other unknown fac-
    tor can cause that trade
    to go against you. Before
    any trade is taken, I al-
    ways want to know where
    I am wrong on the trade
    (meaning where I will exit
    and take a loss).
    THE CHARTS CAN HELP
    Two technical things
    that I focus on, regard-
    less of what markets I am
    trading, are support and
    resistance areas in the
    instrument I am trad-
    Subscribe FREE to the
    PFGBEST Perspectives On...
    newsletter series!
    Stay informed about
    programs to t your personal
    investment & risk prole!
    There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign
    currency products. Past performance is not indicative of future results.
    instrument I am trading.
    See Figure 1.
    BE SYSTEMATIC
    Once those numbers are
    plotted, I begin to build
    a key number ladder and
    look at where the instru-
    ment is trading in rela-
    tion to those areas. Then
    I begin to look for recent
    highs, lows or areas of
    major support based on
    a 30-minute chart (these
    are known as market
    generated key numbers).
    I then compare the num-
    bers from the 30-minute
    chart to my historical key
    numbers and set a stop-
    loss order.
    If I am long when
    the market takes out
    those support areas and
    gets below the daily or
    weekly open, I know I
    am in trouble. Regard-
    less of what method
    you use for support and
    resistance, always have
    a point on the trade
    where you pitch a trade
    and take a loss. Stop-
    loss orders are extreme-
    S
    o
    u
    r
    c
    e
    s
    :

    D
    T
    I

    R
    o
    a
    d
    M
    a
    p

    FIGURE 1: Year Open as Key Pivot
    1077.00
    1086.00
    1095.00
    1104.00
    1113.00
    1122.00
    1131.00
    1140.00
    1149.00
    1158.00
    1167.00
    1176.00
    1185.00
    1194.00
    1203.00
    1214.00
    1221.00
    1230.00
    1239.00
    1248.00
    1257.00
    1266.00
    1275.00
    1284.00
    1293.00
    1302.00
    1311.00
    1320.00
    1329.00
    1338.00
    1347.00
    1356.00
    1365.00
    01-21-2011 03-18-2011 05-13-2011 07-08-2011
    Key Pivot Area of Yearly Open
    Note how the yearly open has proved to be an extremely important pivot (key number). If the E-mini S&P futures are below this area, I will manage
    risk by being very cautious on any long stock or options trades.
    ing, as well as the overall
    market direction.
    Support and resistance
    can be determined by ex-
    amining pivot points, Fi-
    bonacci levels, previous
    highs and lows and by
    drawing just about any
    kind of line on a chart.
    When I nd support and
    resistance, I keep it sim-
    ple. I look at important
    openings in the market
    (these are known as
    historical key numbers):
    yearly, monthly, weekly
    and daily opens of the
    ly important to limit the
    amount of loss.
    DONT MAKE
    THIS MISTAKE
    Many traders risk a lot to
    make a little. A trade is
    taken with $500 worth of
    risk to make $100. There
    are some option strate-
    gies (credit trades) where
    a maximum risk might
    be 4:1 or 5:1, but it is im-
    portant to manage those
    trades so that a full loss
    is not achieved.
    On more traditional
    trade strategies, I typi-
    cally recommend a risk/
    reward of at least 1:1
    (meaning if $1 is risked,
    then the target should
    be at least $1). If you log
    your last 10 trades, take
    a look at average gain
    versus average loss. Cal-
    culate what percentage is
    needed to break even.
    I would argue that most
    traders losing money
    will have losses that are
    two to three times their
    amount of gains. When
    setting up a trade:
    Inovvhereyouare
    wrong
    Inovvhereyouare
    right
    MakesurelherIsk/re-
    ward ratio ts in with
    your accuracy rate
    BE PREPARED
    Anticipate game chang-
    ers. Never take a trade
    that has so much size that
    you are essentially all in.
    If you go all in with the
    markets, eventually some-
    one else will end up with
    your chips.
    Consider economic
    events that would affect
    your position and how
    you would manage risk.
    What happens if the mar-
    ket gaps down? What will
    that do to your stop, and
    how will you react? How
    can you hedge a position
    if the exchange you are
    trading on shuts down for
    one reason or another?
    PROTECT YOURSELF
    To protect against game
    changers:
    InderslandlheoplIons
    market and different
    strategies that can be
    taken to hedge or pro-
    tect a position
    IaveanrmgraspoI
    how to access the 24-
    hour futures market
    There is a saying in
    trading: There are old
    traders and bold traders,
    but there are no old, bold
    traders. The key is not to
    hit the Lotto, but to con-
    sistently take advantage
    of setups when the odds
    are in your favor.
    Wait for the best op-
    portunities, measure the
    risk and then reap the
    rewards.
    Tom Busby is the founder and
    CEO of the Diversied Trading
    Institute (DTI).
    25% OFF!
    Get FREE shipping & handling
    on Roadmap to the Markets &
    Trade to Win.
    GO NOW >>

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