c17 JWBT016-Busby September 30, 2008 14:43 Printer: TBD
Risk Management 163trades, you will not deplete the trading account. Remember that when the
account is empty, you are out of the trading game.
Another way to keep losses low is to never risk more than one-third of
the average true range (ATR) of a product on any single trade. At the time
of this writing, the ATR of the E-mini S&P is about 20 points. Therefore, in
this market I will not risk more than 6 or 7 points on any trade. In fact, I
generally risk about half that amount. I know that if I keep losses low, I can
recoup them on future trades. If you allow a few trades to take you to the
cleaners, it is too hard to make back that cash. Money that you do not lose
today is money that you do not have to make tomorrow.
One problem all traders have is that we all hate to lose. Therefore,
there is a tendency to hold trades and hope for a reversal. Dreaming and
hoping will not make you money. The only way to make money is to be on
the right side of the action. Therefore, if a trade is not paying, admit that
a mistake has been made and get out while the loss is small. Hoping and
dreaming have no place in trading.Use the Two-Minute Rule
When I am day trading, I want to be paid on some portion of my position
in two minutes. I know that fact sounds unrealistic to many of my readers,
but that is how most of my day-trading strategies work. I carefully select
my trading times and wait for a price move in my favor. If that move does
not happen quickly, I am probably wrong. I made a mistake. It is not the
end of the world. I just exit the position and wait for a better opportunity
when my analysis is more on the money.
Since my day-trading strategies work quickly, I suggest to my students
that they check the clock when they enter a trade. In fact, I have a clock
built into my RoadMapTMsoftware for this purpose. DTI students can click
on the clock and time the trade. If the two minutes expire and they are not
making money, they need to reevaluate the trade. Are the indicators and
key numbers still on their side? If so, they may hang with the trade a little
longer. If not, it is probably time to exit and move to the sideline. Prices
can move against a position quickly, and if an error has been made, there
is no need to let it eat up your cash. Take the loss and forget it.Use Stop/Loss Orders
One of the easiest steps that you can take to limit losses is to use a stop/loss
order. Before entering the trade you must identify the price point at which