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Money Management

Notice that no matter how a setup changes it parameters, there will always be one

risk that increases, another that decreases, and one that remains unchanged. This

indicates that risk is being conserved as a whole within the system.

But overall risk is not conserved when the stochastic exit mechanism is em-

ployed. It transforms positional risk into opportunity risk and drastically diminishes

the $risk component, confining $risk to only the most recent trade entry. It exposes

the system to large profit potentials with relatively low levels of accompanying $risk.

This is the first step in skewing risk for greater profit potential. See Figure 28.8.

the four stochastic exit Mechanisms/setups

We shall refer to the four stochastic setups as Type 1, Type 2, Type 3, and Type 4.

All four setups free an open position from $risk and transform positional risk into

opportunity risk.

A Type 1 stochastic exit is simply rolling the stoploss to breakeven once price

is a reasonable distance from the entry (in reality we need to roll the stoploss

figure 28.7 The Conservation of Risk.

figure 28.8 The Skewing of Risk.