7.2.1.1 Stop loss
Stop loss is an integral part of risk management. Stop loss is an order placed to buy or sell security once certain price is reached. It is basically designed to limit the amount of loss on buy/sell position. In fact by placing the stop loss one is just closing the losing position and limiting the amount of loss which can increase beyond imagination.
7.2.1.2 Analyze reward risk ratio
Before initiating a trade, the trade should analyze reward risk ratio. On a conservative basis if the said ratio is less than 1.5 then one should not initiate the trade.
7.2.1.3 Trail stop loss
Initially stop loss is placed to protect one’s capital on a losing trade, but once the trade is in profit stop loss should be so moved that trade is at zero risk even if trailed stop loss gets
triggered.
7.2.1.4. Booking profit
Profit is the only goal for which we all trade. But at the same time profit is profit only when it is realized otherwise its notional profit. Hence one should book profit at predefined target levels and one should not be carried away by one’s emotions specially greed when prices are near to predefined target levels.
7.2.1.5 Use of stop loss
A trader should always put Stop Loss and trade a fraction of his capital. It is very important for the trader to have sound knowledge in the area concerned and should be comfortable with the trading system. He should be aware that it is possible and inevitable to have a losing streak of five losses in a row. This is called drawdown. This awareness will help the traders prepare as to how to control risk and choose their trading system. What we are striving for is a balanced growth in the trader’s equity curve over time.
7.2.1.6 Qualities of successful traders:
1. Always use stops
2. Trade size should be determined on the basis of trading account equity, and stop loss price for every trade.
3. Never trade more than 10% on any give sector
4. Never exceed a loss of 2 to 5% on any given trade
5. Always trade with risk capital, money you can afford to lose.
6. Never trade with borrowed money and don’t overtrade based on the time frame you have chosen to trade
7.2.1.7 Golden rules for traders
Want to trade successfully?
It is very important to choose good positions over the bad ones. Poor trading sense leads to a heavy loss of both the confidence and money. Without a system of discipline for your decision-making, impulse and emotion will undermine skills as you chase the wrong stocks at the worst times.
Many short-term players view trading as a form of gambling.
Many short-term players without planning or discipline jump in the market. The occasional big score reinforces this easy money attitude but sets them up for ultimate failure. Without defensive rules, insiders easily feed off these losers and send them off to other hobbies. Technical Analysis teaches traders to execute positions based on numbers, time and volume.
This discipline forces traders to distance themselves from reckless gambling behavior. Through detached execution and solid risk management, short-term trading fi nally “works”.
7.2.1.8 Do’s and Don’ts in trading:
The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase:
1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.
2. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
3. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.
4. Trends test the point of last support/resistance. Enter here even if it hurts.
5. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
6. If you have to look, it isn’t there. Forget your college degree and trust your instincts.
7. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.
8. Avoid the open. They see YOU coming sucker
9. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
10. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
11. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
12. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
13. Bottoms take longer to form than tops. Greed acts more quickly than fear and causes stocks to drop from their own weight.
14. Beat the crowd in and out the door. You have to take their money before they take yours, period.