Entry, Exit and Risk Management

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HOW TO MANAGE TRADING RISK Why Protect Your Trade? Risk Management moves you from emotion to discipline Risk Management allows for more losses Risk Management requires an understanding of technical analysis Risk Management starts with stock selection Risk Management is non-negotiable

HOW TO MANAGE TRADING RISK Mental Preparation Recognize that risks exist which will result in losses Accept the fact that the risks are neither fully identifiable nor quantifiable Develop and execute with discipline a plan to protect against these risks

HOW TO MANAGE TRADING RISK Basic Steps Identify the market and segment trends Identify stocks within the trends Identify your entry price Identify your stop price Calculate your position size Execute your opening trade and your stop order

HOW TO MANAGE TRADING RISK Basic Steps Identify the market and segment trends Identify stocks within the trends Identify your entry price Identify your stop price Calculate your position size Execute your opening trade and your stop order Determine overall market trends ($DJI, $SPX, $NDX, $RUT, $MID) Create a Basic, Fundamental and Technical screen

HOW TO MANAGE TRADING RISK Basic Steps Identify the market and segment trends Identify stocks within the trends Identify your entry price Identify your stop price Calculate your position size Execute your opening trade and your stop order Moving Average Gap Role Reversal Candle Patterns HCOLHCOL HOCLHOCL

ENTRY and EXIT Gaps Gap

ENTRY and EXIT Role Reversal

HOW TO MANAGE TRADING RISK Basic Steps Identify the market and segment trends Identify stocks within the trends Identify your entry price Identify your stop price Calculate your position size Execute your opening trade and your stop order Calculate your Risk Amount ex. $100,000 account; 2% x $100,000 = $2,000 Risk Amount Calculate your Risk Per Share (Entry Minus Stop) ex. Buy at $45 – Stop at $43 = $2 Risk Per Share Position Size = Risk Amount / Risk Per Share ex. $2,000 / $2 = 1000 Shares

Buy XYZ stock at $45 and protect against loss with a fixed stop below $43 Buy at $45 Sell Stop at $43 HOW TO MANAGE TRADING RISK Protect with a Stop Order

HOW TO MANAGE TRADING RISK Protect with a Stop Order Buy XYZ stock at $45 and protect against loss with a fixed stop below $43 Order Type: Sell stop Condition: Price at or below stop Execution: Sell the stock

HOW TO MANAGE TRADING RISK Protect with a Trailing Stop Order Buy XYZ stock and protect against loss with a trailing stop below the purchase price BUY Initial Stop Price Trailing Stop Price

HOW TO MANAGE TRADING RISK Protect with a Trailing Stop Order Buy XYZ stock and protect against loss with a trailing stop below the purchase price Order Type: Trailing Sell stop Condition: Price at or below trailing stop Execution: Sell the stock

HOW TO MANAGE TRADING RISK Protect with a Trailing Stop Order

Entry, Exit and Risk Management

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait. G. K. Chesterton ( ), Orthodoxy (1908)

HOW TO MANAGE TRADING RISK How Do You Choose? GAIN SCENARIO A. $700 B. 80% chance of $1000 LOSS SCENARIO A. $700 B. 80% chance of $1000

HOW TO MANAGE TRADING RISK How Do You Choose? GAIN SCENARIO A. $700 B. 80% chance of $1000 LOSS SCENARIO A. $700 B. 80% chance of $1000 EXPECTED $700 gain $800 gain $700 loss $800 loss ✔ ✔