P1:a/b P2:c/d QC:e/f T1:g
c14 JWBK182-McDowell April 25, 2008 16:23 Printer: Yet to come
Risk Management Rules to Choose From 145Seems simple enough, but in reality, it can be emotionally difficult to
achieve, depending on how the trade is going and how developed your trad-
ing psychology is. Refer to Chapter 7 for more details on designing your
rules. Here are some to start with: Determine initial stop-loss exit prior to entering the trade.
Adhere to stop-loss exit when it is hit, and exit the market immediately.
Use a stop-loss exit strategy that is based on market price ac-
tivity, key support and resistance levels, volume, volatility dynam-
ics, and/or on fundamental rules (not on random and spontaneous
decisions).
Use trailing stops to lock in profit when the market moves in your
favor.
Use scaling-out rules (see next section) to lock in profit and relieve
anxiety.
Do not move stops for emotional reasons.
When you increase your trade size (by scaling in to a position), adjust
your stop to allow for additional risk.
When holding a position overnight, if you are a day trader, adjust your
stop to allow for additional overnight risk.
Try to have stops that breathe so that you do not get whipsawed when
the market is choppy.
Other:HOW WILL YOU SCALE OUT OF A
POSITION?Scaling out of positions can be a great way to lock in profit and reduce
anxiety when a position has a sharp turn into profitable territory. Identify
the rules you want to use in determining when to scale out. Some ideas for
these rules could be: 30 percent for first scale-out, 30 percent for second scale-out, and hold
40 percent of trade until getting stopped out.
1/3 of position for first scale-out, 1/3 of position for second scale-out
and hold the remaining 1/3 until stopped out.
When market gaps in a profitable direction creating a 50 percent gain.
Example: If you entered a long stock position at $20.00 per share and
it gapped up to $30.00 per share, you could liquidate a portion of your
position to lock in profit.
Other: