c17 JWBT016-Busby September 30, 2008 14:43 Printer: TBD
Risk Management 165First, establish profit targets. Where do you expect to exit the trade with
money in your pocket? Be realistic in setting this goal. There is a popular
show on television that fascinates me. It is calledDeal or No Deal.In the
show, contestants play the odds and try to win a million dollars. Most of the
contestants have no idea of how to calculate the odds. All they think about
is that they came hoping to win a million. Even when there is no longer any
hope that they will succeed, they keep risking everything to keep trying.
Even when the odds are hugely against them, they will keep playing the
game and hoping for that elusive million. The smart contestants work their
way up to a nice sum—maybe even a few hundred thousand dollars—take
the money, and go home. They understand that what you want and what
you get are not always the same. You have to be realistic in establishing
your goals.
Trading, likeDeal or No Deal,is all about the odds. Just like the con-
testants on the show, when you get into a trade, you want to make a lot
of money from it. But you have to be reasonable. How much profit can
you realistically expect from the trade in light of the time of day and the
key numbers near your entry price? If the ATR of the S&P 500 E-mini fu-
tures is 18 points during the course of the session and it has already moved
15 of those points, do not expect to make 20 points of profit. It is possi-
ble that you could do that, but the odds of doing so are not in your favor.
Therefore, look at the market and the key numbers and determine profit
targets. Set the first profit target at the first key number that you hit. For
example, if you are short, take at least some profits at the nearest level of
support. If you are long, take at least some portion of your positions off at
the next level of resistance. If the market is strong enough, there might be a
move through and above resistance or through and below support. In that
case, a second profit target could be placed at that resistance or support
level. The important thing to remember is that when a trade is made, know
where profit will be taken. Do not settle for pennies when dollars can be
made. Consistently doing this will cause you to lose money. The reason is
simple: you will have losses. You need money to offset them and to add
value to your account. If you take big losses and little profits, you are go-
ing broke. Do not be greedy, but remember not to sell yourself and the
market short.PEARL 25
When you hear someone say, “You do not go broke taking profits,” RUN. That
is exactly how it happens.When the mouse is clicked and the trade is entered, follow through
immediately with profit orders. Get them in the market, not just in your