Risk Management for Traders

RISK-MANAGEMENT

  • Your first loss is the best loss.
  • Let winning positions run and cut losing positions short. The market is always right.
  • I finally understand why Kirk always says risk management is the most important thing.
  • Always know your exit. Before any trade is made, you must always identify your stop beforehand and then follow it without hesitation if it triggers.
  • Patterns and trends matter more than I thought…paying attention to them can provide better entry/exit points.
  • Patterns and measured moves are key but you have to wait until a pattern is triggered and the trigger holds.
  • Being patient and waiting for confirmation instead of trying to anticipate market movements.
  • Risk is greatest when everyone who wants to buy has already done so – Apple is the latest example!
  • Position sizing is my first and last line of defense.
  • Leverage is for losers.

It is amazing how so very true this is…

so-right

Many of us repeat the same old mistakes others have made  before us because we never stop, think and question the process.  If you are not doing something different that has not worked in the  past, then chances of success are virtually non-existent.  What things do you do each day only because you think they  work or you have been told by others that they do, but in  reality you really don’t know for certain?

As traders and investors we have to question everything to make  sure we don’t make the same mistakes again. The only way to  elevate our game and put the most odds in our favor are to do  things much differently that the herd. To eliminate as many errors and mistakes as possible and to work each day on improving our approach so that we stay ahead of and not behind the vast majority. 

Small steps each day, each week, each month over time will help you get where you want to go, but it always starts with  questioning everything and making absolutely sure that your strategy and the decisions you make are always built upon a very strong foundation.

Betting Rules by Phantom of the Pits

In a losing game such as trading, we shall start against the majority and assume we are wrong until proven correct! (We do not assume we are correct until proven wrong.) Positions established must be reduced and removed until or unless the market proves the position correct! (We allow the market to
verify correct positions.)

It is important to understand that we are saying the one criteria forremoving a position is because it has not been proven correct. We at no time use as criteria for removing a position the fact that the market proved the position incorrect.

There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct, it is still possible the market has not proven the position wrong. If you wait until the market proves the position wrong, you are wasting time, money and effort in continuing to hope it is correct when it isn’t.

How many traders ever hoped it wouldn’t be proved wrong instead of hoping it was correct? If you are hoping it is correct, it obviously wasn’t ever proven to be correct. Remove the position early if it doesn’t prove correct.By waiting until a position is proved wrong, you are asking for more slippage as you will be in the same situation as everyone else getting the same message.

What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn’t their decision to get out at all — it is the market’s decision to get you out.

Your thinking should be: When your position is right, you have to do nothing instead of doing nothing when you are wrong!

I don’t mean to repeat and repeat but, in this case, you will better understand the rule the more you read it. It is very critical to your success in trading. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss.

A person’s thinking when the market proves a trade to be bad is counter to what is productive. By using the rule properly, you are productive and don’t have to face the demoralizing effect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative reinforce your thinking. This way you only let good trading
reinforce your thinking and actions.–Phantom of the Pits

Rule Number Two:

Press your winners correctly without exception.

Sounds pretty elementary but correctly is the key. What you hear quoted most of the time is cut your losses. Cutting you losses is only one side of the coin. Without Rule 2, you will find that trading still isn’t even a 50/50 game. Without a correct method to press your correct positions, you will never recover much beyond your losses. You need rule two to ensure you have a larger position when you are correct. You always want a larger position when you get a great move or trending market than when your position isn’t correct.

There certainly will be debate on how you know when to add to a correct position and on how a market can turn a correct position into a wrong position. We will cover those debates later. First, let us get the rules and reasons established. By knowing what is expected in Rules 1 and 2, we can prove the theorem based on good assumptions and experience.

Rule 2 does not mean just because you have a position in your favor that you must now add to that position. Correctly in Rule 2 means you must have a qualified plan of adding to your position once a trend has established itself. The proper criteria for adding positions depends on your time frame of expectations in your trade plan. Continue reading »

Trading & Marriage

  1. There are people that are fun to date but are not marriage material. There are stocks that have great momentum that you can trade, and others with growth and earnings that you can invest in over the long term.
  2. When dating, you have to have a ‘deal breaker’ reason to end the relationship. When buying a stock, you always need a ‘stop loss’ price level that tells you the trade is just not working and you should exit.
  3. You have to find the right person for you. Someone might be a great person, but not be the right person for you. Some stocks could be too volatile or too slow moving for you to trade. You have to find one that works for you.
  4. When you marry the wrong person, the longer you wait to divorce them, the more expensive the divorce will be. The longer you let a losing trade run, the larger your loss will become.
  5. The biggest predictor of future behavior is past behavior for both people, and stocks. The definition of insanity is expecting different results from either, despite past behavior.
  6. You should devote time and attention to your spouse, because that is the key to a successful marriage. In trading, you need to devote yourself to your trading plan and risk management in order to be successful.
  7. Successful stock traders do not marry their stocks, they only date them for as long as they are profitable.

What Warren Buffett said…

W.B* For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.
* Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
* The important thing is to keep playing, to play against weak opponents and to play for big stakes.
* Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
* There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do. Continue reading »