Breaking It Down: Risk management
Strategic Foundations: Planning Your Trades for Success.
New series on risk management.
Strategic Trade Planning:
Emphasizing the importance of planning, the adage, "Plan the trade and trade the plan," In the realm of trading, the effectiveness of strategic planning can significantly influence success.
Selecting the Right Broker:
Choosing a suitable broker for active trading is crucial. Some brokers may not cater to frequent traders, charging high commissions and lacking essential analytical tools necessary for successful trading. Trailing stops, stop limits and so on need to be available by your broker.
Utilizing Stop-Loss and Take-Profit Points:
Successful traders are well-versed in determining their purchase and sale prices, thereby effectively utilizing stop-loss (S/L) and take-profit (T/P) points. This calculated approach enables them to evaluate potential returns against the likelihood of their desired stock outcomes.
The One-Percent Rule:
Adhering to the one-percent rule, many traders ensure that no more than 1% of their capital is invested in a single trade. This rule becomes even more stringent as account balances increase, serving as an effective measure to mitigate excessive risk.
Understanding Stop-Loss and Take-Profit Points:
Stop-loss points act as safeguard mechanisms, facilitating the selling of stocks to prevent further losses. Conversely, take-profit points enable traders to capitalize on favorable market conditions by selling at optimal points.
Effective Techniques for Setting Points:
Technicals and fundamentals play pivotal roles in setting stop-loss and take-profit points. Utilizing moving averages, channels, support or resistance and trend lines aid in identifying optimal entry and exit points for trades.
Key Considerations in Setting Points:
Employ longer-term indicators for volatile stocks to prevent premature stop-loss execution.
Adjust indicators based on targeted price ranges to limit the number of signals generated.
Maintain a prudent distance for stop-loss points to avoid unwarranted execution.
Adapt stop-loss points according to market volatility, tightening them during periods of price stability. (ATR)
Factor in fundamental events, such as earnings releases, to gauge potential trade volatility and uncertainty.
Jason Perz AAO Research