Stocks

Managing Risk With All-Time Highs

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Brandon Wendell
Instructor, CMT

Before I start with the new topic for this week, I need to make a correction on last week’s article. In the Surfing for Dividends article, I mentioned that the trader or investor who bought the shares on the Ex-Div date would receive the dividend. This was incorrect. You would have to have purchased the shares the day BEFORE the ex-div date. Buying on the ex-div date or after does not entitle you to receive the dividend. I want to thank Mike Siewruk from our Tampa office for pointing that out.

This week I wanted to address a question that came to me recently from a student via email:  “Just curious how to plan to start trading when I am coming into markets that are seeing highs that have never been seen before?  How do you manage risk in that type of environment if at all different?”

The answer is that there should not be any difference in your risk management from one market to the next.  We cannot control the direction of the markets.  We can only control how much capital we choose to put at risk and how much we may be willing to lose.  In the case of markets making all time highs, if you are buying at a demand zone, your risk is defined by the distance between your entry in the demand and the stop which should be below the distal line of the demand.  You control the losses by your choice of share size.

If you are looking to short a supply zone that was created intraday or even on a longer timeframe chart, you would still be able to measure your risk in the same manner: entry to the stop price multiplied by your share size.  You may want to take an extra step to see if the trend is actually changing in your trading timeframe or is just showing a correction.  We teach how to do this in detail in the Extended Learning Track.

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This is why it is necessary to create rules for our trading and to have a trading plan where these rules are reviewable.  Part of the plan should include the maximum amount you are allowed to risk per trade.  This should be a small percentage of the entire cash value of your trading account.  The reason is so that you will not do serious damage to your account (and psyche), by losing too much on failed trades.

We will not be right all of the time as traders.  We must make our losing trades manageable so that we can easily overcome and learn from them while still having enough capital to continue on our path to trading success!

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.