Teach Talk Trade Day Trading & Technical Analysis

Trading Tips in this Volatile Market….

 No matter what the trading  environment that you are in, all good traders know that the key to staying in the  game is maintaining a good risk & money management strategy. While most traders will simply define risk management as “loss control”, there is really more to it. Risk management should be the constant modulation of risk exposure to a constantly changing market. What is this exactly?

Most traders will set their entire risk management strategy to setting and adhering to “stop losses.” But this falls far short of what risk management really is. Risk management strategy just using simple stop losses would be equivalent to saying “I am safe in my car because I have brakes.” Needless to say, the “brakes” are only part of an entire system of managing risk in a constantly moving environment such as street traffic. The markets are similar to the streets. There are far more actions we can take to minimize risk besides the brakes: there is steering, controlling the throttle, the path you take, “your trip preparation,” mapping your route, the times you drive, the amount of driving you do, not driving while “under the influence,” there are so many factors that affect risk levels, that we cannot possibly reduce the entire risk control strategy down to “brakes,” or in the case of trading, “stop losses.”

How we make and lose money is the end result of our interaction with the market. If we do not interact, we neither win nor lose. If we interact too much or too little, we assume higher levels of risk. Risk management should be the constant “adjustment” of our risk exposure based on market conditions and our very own performance.

How can you modulate your risk exposure? There are 3 primary ways:

* SIZE: How large or small our positions are, based on our account values. The more we expose our account, the “larger” the exposure.
* FREQUENCY: How often we are in-and-out of the market. The more frequent we trade, the more we are exposed to the markets motions over time, the more risk we assume. Also, commission costs become a factor that significantly affects risk levels as we increase frequency.

* DURATION: The longer we are in each trade, the more opportunity the market has to travel, the higher our risks will be.

To properly modulate your risk you have to assess and adjust all three areas of exposure - size, frequency and duration. As you increase one, you must compensate by lowering another.

The biggest single error most traders commit is to place too much of an emphasis on one area of risk exposure while ignoring the other areas. In the end, by ignoring some of the other exposure areas, a trader is left watching his trading account dwindle in size as the losses mount.

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