Risk Management
In our previous posts, we have deliberated enough on managing risk. How profits may or may not be part of your trade as profits are outcome of probability, but risk is constant part of trade, throughout its life. As long as trade is active, risk is active too.
Managing risk is not just about placing stop loss on your trade! The trade size is equally important and plays a important role. How many times it had happened in your trading career, that you placed most of your bets on one trade which you considered high conviction trade, however once in the trade with proper stop loss and trade plan, eventually it did not work and you lost? How many times did you consider a trade not so convincing, accordingly you bet very small amount on it and the trade goes on to become high performer?
In both the above hypothetical situations, the conviction / gut feeling / emotions of the trader were not respected or considered by the market. In both the cases trader managed his risk by placing stop loss, however he lost big, very very big in high conviction trade of his, earned very small profits in low conviction trade.
Some will say "Big Deal! trading is game of probability and conviction, you win some, you loose some. Deal with it!" We fully agree, since trading is all about probability and most of the time you have 50% chance of being in correct trade, prudent risk management requires you to not loose big or win small for your own survival. If this is not followed, your trading account will vanish quicker than you imagined.
Position Sizing
As now we know, variation in position size leads to increased losses or decreased profits, how about leaving the conviction / gut feeling / emotion part too for markets to decide? This requires that every trade of your starts with same position size and the same initial risk.
As soon as the trade moves strongly in profits, you add to your initial position and add more quantity. It is important to make sure that your follow up buys are smaller than the initial buy otherwise your average entry price too will increase and also the initial risk. While increasing the quantity you have to provide your trade enough room to pull back or consolidate, even when managing your initial risk.
How to Go about it?
Above chart is of VST Tillers Tractors Ltd, one of the star performer trade of BullishMomentum. The image explains how you can build on your winning trades. It is like rewarding your winning trade with additional quantity, while managing the initial risk all the time. One has to keep delicate balance while increasing the position size so as to ensure lower average cost. Each addition should be on high volume days or on pull backs to moving average as per your trading setup.
Wealth Creation
If you approach every trade this way, you will ensure, that every loosing trade stays small while winning trades gets bigger. What's important is to not get carried away while increasing the position size and not increase the initial risk. You should keep moving your stop loss to breakeven. It will be foolish to let a big winner turn into looser.
Hope you enjoy reading our blog and posts, please feel free to share your feedback with us. See you soon!
No comments:
Post a Comment