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THE 1 HOUR TRADE Controlling Risk

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Ideally your pre-trade review, which we’ll get to in Chapter 6, should keep you from entering trades that don’t have a high probability of success. Even with that being the case, we always run the chance that we may have more losing trades than winning trades.

Ideally your pre-trade review, which we’ll get to in Chapter 6, should keep you from entering trades that don’t have a high probability of success.
Even with that being the case, we always run the chance that we may have more losing trades than winning trades.

That is ok.

While I won’t get into the mathematics which proves it, trust me when I tell you that a high winning percentage is not important; what IS important is ensuring the AMOUNT of your gains is more than the AMOUNT of your losses.

This setup, when followed properly, will provide big gains for you.
As long as you follow the rules and exit losers for small losses and let the winners run, you’ll be profitable.

That is assuming you manage your money and trade size appropriately, as well as maintain discipline.

Money Management

First things first; you need to know how much money you are going to risk per trade.
Never risk more than 1% to 3% of your total account balance on any one trade.
To calculate your per trade maximum loss, simply multiply your account balance by your chosen risk figure (1-3%).

For example, if your risk tolerance is 2% per trade and you have an account balance of $8,000, your maximum allowable loss on any one trade is $160 (.
02 x 8000).
It should include entry and exit commissions, so conservatively we’ll say the maximum loss per trade is $140 (This is the amount you can lose if your stop is hit, not the amount of capital you commit to a trade.
).

The reason I like this method is because as your account balance grows, it allows your trading size to grow; however, if your account balance is decreasing, it lowers the amount of money you can lose on any one trade.

The next step is calculating the maximum number of shares you’ll be allowed to purchase while honoring your maximum allowable loss.
This number will differ from trade to trade depending on the price of your stop-loss exit and your entry price.

In the high volume runner setup, we will usually know our stop-loss before our actual entry price.

To figure out how many total shares you can purchase in a trade (i.
e.
your maximum position size), divide your maximum allowed loss by the price difference between the stop-loss price and estimated average holding price.

For example, assume you’re considering a setup where the stop-loss exit is $3.
54, and the current price is $3.
62.
Taking the $140 maximum allowed loss we calculated above, divide that by $0.
08 ($3.
62 – $3.
54 = $0.
08), and you get 1,750 as your maximum position size (140/.
08 = 1750).

I’ve provided an Excel spreadsheet that will quickly calculate the position sizing figures for you here:

http://www.langhamtrading.com/tradesize

However, you need to be able to quickly calculate this stuff in your head, because these high volume runner setups move quickly.
Practice your mental math muscles as much as possible.

Account Size

Here’s a story that is well worth noting: On July 16th (2014), Nasdaq halted trading in NewLead Holdings (NEWL) in the middle of trading hours at a price of $4.
38, after hitting a high of $5.
03 that day.
NEWL went on to get delisted from Nasdaq.

On July 22nd, it reopened at $2.
55 and plummeted from there.
This type of trading halt and subsequent delisting rarely happens, but be aware that it does.
And life isn’t fair; it could happen to you.

By the way, there were over 30 MILLION shares traded in NEWL the day it was halted.
A lot of people lost a lot of money that day.

I’m sure you’ve heard before, “Don’t trade with money you can’t afford to lose.
” This is a little unrealistic, in my opinion, and seems more like a disclaimer than actual advice.
Here’s some honest advice: be conservative, never risk more than 1-3% of your capital on any one trade, be very careful any time you have more than 25% of your total capital at play in any one trade, and just be aware of the risk involved in trading, even intra-day trading.

Be smart.

If your account balance is under $25,000 (and you have a margin account), you’ll be subject to “pattern day trading” restrictions, which means you can’t make over three trades in a rolling five-day period.
It’s a ridiculous law, but you are at its mercy nonetheless.
Make sure you’re aware of your online brokerage’s particular treatment and interpretation of pattern day trading (Some brokerages count multiple orders of a single stock as one trade, while others count each separate purchase as a new trade).

The pattern day trading restrictions do not apply to cash accounts (non-margin) under $25,000, but “Free Riding” restrictions do.
Free Riding is another idiotic SEC restriction, but, alas, you are subject to it nonetheless.

For reasons I can’t fathom in this day and age, stock transactions with your online broker take three days to settle.
You cannot use the proceeds from a sale of stock to purchase another stock until the proceeds from the sale have “settled.
” This means if you’re in a trade utilizing your full account balance, and you exit, you won’t have access to that balance to place another trade for three days.

Bottom line, if you’re working with a non-margin account under $25,000, you must be selective with your trades; only enter ideal setups (We’ll get to how to identify ideal setups shortly).

Psychology

Equally important to managing your risk is your mental discipline.

When I was consistently losing money or just scraping by with marginal gains, I would often enter market orders when I found a stock I wanted to enter.
I was always fearful that I had found a huge trade but it was taking off that moment, seconds after I had located it; if I didn’t get in now, I would miss it.

After I shifted my mindset to the new thinking of “master only a few setups,” I stopped chasing entries.
I rarely placed market orders any longer, unless it was acceptable per the parameters of the setup (We never use market orders in this setup).
In most of my setups now, I put a tight range of bids where I believe strong support to be, so I have a low risk stop under my entry level.
Many times I miss trades, but that is ok; there are others soon to come.

That newly found patience made a huge difference in my profitability.
Rather than hitting the market to enter a trade, I patiently sat with bids at a level where fear would drive the emotional traders out, and they’d sell into support.
If you see an area of support but you think the trade has moved above it, never to return, think again.
It may take a few days or even weeks, but it will come down again to allow a low risk, high reward entry.
And If it doesn’t, you’ve lost nothing.

The creative part of your mind is your enemy.
The emotions you’ll feel, the hopes and wishes you have for the trade, your opinion about where the price is going, the fear that you’re going to miss out on a profit if you don’t get into the trade at this very moment—all these thoughts are working against you.
You need to turn off everything but the analytical, rational part of your mind.
This is easier said than done, but there are tools that can help.

One is your stop-loss order.

Do not use a mental stop.
As soon as you execute an entry order, execute the stop-loss order to sell.
Then move it higher to the break-even point as soon as the price action allows (more detail on this later).
In this setup, you’ll be able to enter a conditional order, which will execute your stop order automatically as soon as your purchase order is filled.

You need to develop a mantra:

“There will always be another trade.

Learn it, know it, live it.

Above all else, be patient.
Weeks or more may go by without a valid, optimal green flagged setup appearing.
  Hold steady and trust that one is coming; these setups will continue to show themselves.
You cannot force a good high volume runner setup.

Patience alone can actually be enough of an edge in the market to be successful, as long as it’s patience for a good entry.
Patience has no place in a losing position; exit your stop-loss immediately, and let your winners run.

It is ok to miss a trade.
The worst thing you can do is hit a market order because you think the stock is running, and you believe you’ve missed the entry.
The chances of your market order nailing the ideal price at the exact moment of your execution are next to nil.

Every dollar you lose trying to force a trade or chase an entry is a dollar that isn’t there for you when a 50%, 100%, 200% runner shows up.
Only enter a trade according to the low risk parameters of this setup, which we’ll get to.

Never chase an entry.
There will always be another trade.
And one final time for good measure .

NEVER CHASE AN ENTRY.
THERE WILL ALWAYS BE ANOTHER TRADE.

That is ok.

While I won’t get into the mathematics which proves it, trust me when I tell you that a high winning percentage is not important; what IS important is ensuring the AMOUNT of your gains is more than the AMOUNT of your losses.

This setup, when followed properly, will provide big gains for you. As long as you follow the rules and exit losers for small losses and let the winners run, you’ll be profitable.

That is assuming you manage your money and trade size appropriately, as well as maintain discipline.

Money Management

First things first; you need to know how much money you are going to risk per trade. Never risk more than 1% to 3% of your total account balance on any one trade. To calculate your per trade maximum loss, simply multiply your account balance by your chosen risk figure (1-3%).

For example, if your risk tolerance is 2% per trade and you have an account balance of $8,000, your maximum allowable loss on any one trade is $160 (.02 x 8000). It should include entry and exit commissions, so conservatively we’ll say the maximum loss per trade is $140 (This is the amount you can lose if your stop is hit, not the amount of capital you commit to a trade.).

The reason I like this method is because as your account balance grows, it allows your trading size to grow; however, if your account balance is decreasing, it lowers the amount of money you can lose on any one trade.

The next step is calculating the maximum number of shares you’ll be allowed to purchase while honoring your maximum allowable loss. This number will differ from trade to trade depending on the price of your stop-loss exit and your entry price.

In the high volume runner setup, we will usually know our stop-loss before our actual entry price.

To figure out how many total shares you can purchase in a trade (i.e. your maximum position size), divide your maximum allowed loss by the price difference between the stop-loss price and estimated average holding price.

For example, assume you’re considering a setup where the stop-loss exit is $3.54, and the current price is $3.62. Taking the $140 maximum allowed loss we calculated above, divide that by $0.08 ($3.62 – $3.54 = $0.08), and you get 1,750 as your maximum position size (140/.08 = 1750).

I’ve provided an Excel spreadsheet that will quickly calculate the position sizing figures for you here:

http://www.langhamtrading.com/tradesize

However, you need to be able to quickly calculate this stuff in your head, because these high volume runner setups move quickly. Practice your mental math muscles as much as possible.

Account Size

Here’s a story that is well worth noting: On July 16th (2014), Nasdaq halted trading in NewLead Holdings (NEWL) in the middle of trading hours at a price of $4.38, after hitting a high of $5.03 that day. NEWL went on to get delisted from Nasdaq.

On July 22nd, it reopened at $2.55 and plummeted from there. This type of trading halt and subsequent delisting rarely happens, but be aware that it does. And life isn’t fair; it could happen to you.

By the way, there were over 30 MILLION shares traded in NEWL the day it was halted. A lot of people lost a lot of money that day.

I’m sure you’ve heard before, “Don’t trade with money you can’t afford to lose.” This is a little unrealistic, in my opinion, and seems more like a disclaimer than actual advice. Here’s some honest advice: be conservative, never risk more than 1-3% of your capital on any one trade, be very careful any time you have more than 25% of your total capital at play in any one trade, and just be aware of the risk involved in trading, even intra-day trading.

Be smart.

If your account balance is under $25,000 (and you have a margin account), you’ll be subject to “pattern day trading” restrictions, which means you can’t make over three trades in a rolling five-day period. It’s a ridiculous law, but you are at its mercy nonetheless. Make sure you’re aware of your online brokerage’s particular treatment and interpretation of pattern day trading (Some brokerages count multiple orders of a single stock as one trade, while others count each separate purchase as a new trade).

The pattern day trading restrictions do not apply to cash accounts (non-margin) under $25,000, but “Free Riding” restrictions do. Free Riding is another idiotic SEC restriction, but, alas, you are subject to it nonetheless.

For reasons I can’t fathom in this day and age, stock transactions with your online broker take three days to settle. You cannot use the proceeds from a sale of stock to purchase another stock until the proceeds from the sale have “settled.” This means if you’re in a trade utilizing your full account balance, and you exit, you won’t have access to that balance to place another trade for three days.

Bottom line, if you’re working with a non-margin account under $25,000, you must be selective with your trades; only enter ideal setups (We’ll get to how to identify ideal setups shortly).

Psychology

Equally important to managing your risk is your mental discipline.

When I was consistently losing money or just scraping by with marginal gains, I would often enter market orders when I found a stock I wanted to enter. I was always fearful that I had found a huge trade but it was taking off that moment, seconds after I had located it; if I didn’t get in now, I would miss it.

After I shifted my mindset to the new thinking of “master only a few setups,” I stopped chasing entries. I rarely placed market orders any longer, unless it was acceptable per the parameters of the setup (We never use market orders in this setup). In most of my setups now, I put a tight range of bids where I believe strong support to be, so I have a low risk stop under my entry level. Many times I miss trades, but that is ok; there are others soon to come.

That newly found patience made a huge difference in my profitability. Rather than hitting the market to enter a trade, I patiently sat with bids at a level where fear would drive the emotional traders out, and they’d sell into support. If you see an area of support but you think the trade has moved above it, never to return, think again. It may take a few days or even weeks, but it will come down again to allow a low risk, high reward entry. And If it doesn’t, you’ve lost nothing.

The creative part of your mind is your enemy. The emotions you’ll feel, the hopes and wishes you have for the trade, your opinion about where the price is going, the fear that you’re going to miss out on a profit if you don’t get into the trade at this very moment—all these thoughts are working against you. You need to turn off everything but the analytical, rational part of your mind. This is easier said than done, but there are tools that can help.

One is your stop-loss order.

Do not use a mental stop. As soon as you execute an entry order, execute the stop-loss order to sell. Then move it higher to the break-even point as soon as the price action allows (more detail on this later). In this setup, you’ll be able to enter a conditional order, which will execute your stop order automatically as soon as your purchase order is filled.

You need to develop a mantra:

“There will always be another trade.”

Learn it, know it, live it.

Above all else, be patient. Weeks or more may go by without a valid, optimal green flagged setup appearing.  Hold steady and trust that one is coming; these setups will continue to show themselves. You cannot force a good high volume runner setup.

Patience alone can actually be enough of an edge in the market to be successful, as long as it’s patience for a good entry. Patience has no place in a losing position; exit your stop-loss immediately, and let your winners run.

It is ok to miss a trade. The worst thing you can do is hit a market order because you think the stock is running, and you believe you’ve missed the entry. The chances of your market order nailing the ideal price at the exact moment of your execution are next to nil.

Every dollar you lose trying to force a trade or chase an entry is a dollar that isn’t there for you when a 50%, 100%, 200% runner shows up. Only enter a trade according to the low risk parameters of this setup, which we’ll get to.

Never chase an entry. There will always be another trade. And one final time for good measure .

NEVER CHASE AN ENTRY. THERE WILL ALWAYS BE ANOTHER TRADE.

この記事を書いている人 - WRITER -

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