Today is Wednesday March 24th and we had a little pull back in the major index’s, -5 points on the S&P, -52 on the Dow and -16 on the NASDAQ.
Today’s action was quite normal given the large run up over the past weeks. The market still has plenty of room to move sideways and rest. We saw an inside day for the S&P futures from yesterdays range. This will build a bit of pressure for Thursdays session. A break out above 1166 should bring us higher prices and a break below 1161 should produce lower prices. Those are pretty key area’s as of now going into tomorrows session. Currently we are right in the middle at 1164.50.
Today I am going to talk about managing risk. This is a question that comes up all the time and I will go over a few points here on the subject.
Risk management is essential to surviving the trading game. I have mentioned recently in my previous posts this last week that a 1 to 1 risk ratio is alright as long as you are right more than you are wrong, sounds pretty simple and it is. I know many traders trade only the same amount on every trade and if that works for them, I guess that is fine. But let me give you an alternative idea. If you are trading poorly and have gone back and forth with no progress, I would suggest to decrease your size if possible, until the best opportunities come along. Waiting the market out, for favorable price pattern opportunities is the best, but if you continue, it is better to decrease your size until you start to see the best opportunities come to you.
There are definitely better trade conditions on some days over others. On the days things do not seem clear, you are better off to trade very small and or wait. I recommend waiting until you are sure you have the edge. If you jump into the market and expect things to fall your way, when you have not done the work necessary to give yourself the trading edge, in this case, “Waiting”, which is a trade position, you can not expect to come out on top.
Waiting the market out, for the trading edge, is as I mentioned “a trade position”. It is a “no position” and that is just as important as putting on a position. Try and let that sink in just a bit. Often, traders will expect, hope, wish and want the conditions that they seek to make there trading goal for the day.
I have to watch this myself and I do, if it does not posses the qualities that gives me the edge, you have to wait. Most of the time if you are a scalper, looking to take a point or more from the S&P futures, you wont have to wait long. By waiting 10-20 minutes, especially in the morning open, you will get a whole new set of reads and new opportunities that will jump out at you or it should. If it doesn’t, I will use an over used term, but it applies, “Just say No”. You are not under any obligation to take a trade, after all, we are traders and we trade market not the other way around. The market does not make us trade, we trade against the market and other professionals.
If we are going to have money on the line, we need to be sure that we have the trading edge. Some traders may be saying, what is that and how do I get it? You need to have a model, method or approach that is consistent. Many struggle trying to find this and there are no easy answers. It needs to something that will always work and I would say based on price and its predictable movements. This is the best in my estimation. In addition, once you have that, you will need to get familiar with it and practice. The practice is going to bring the confidence you need to give you the results you are looking for.
If you are going to control your risk, you will have to look to exit the trade if you start to loose the advantage. That is what I do, if I don’t get the results I am looking for after entering a new position. Order placement is going to be the key. If you place your order to buy or sell and you overpay for that position, you run the risk of getting taken out, if you run a small stop. There is a way to do this and keep your risk down. Most traders are not able to find the “Sweet Spot”, in there order placement, but that is what is needed to make this work.
Trade selection and order placement are key components to risk management. Don’t look to trade every twist and turn. If you have a modest trading goal for the day and I think traders should, you only need to break this down into a few trades. If they are the right trades using method trade selection and you trade multiple contracts, you always have the option to scale out. I know for a fact that lots of traders do not like doing this. The reasoning, if I can get two points on 4 contracts, why not take it all instead of half. The point is, you don’t always know if you are going to see the 2 points in the first place. What started out as a nice gain turns into a loss and creates frustration. “Trade by exception, you will be glad you did”
No trading for me today, I was traveling to the S.F. bay area. I may continue with this line of reasoning in tomorrows post, so until then. Good Trading and be Safe ! GMR62JYPQ7EG
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