Managing Risk On A Macro Level (10 Days To Master Part-Time Swing Trading Challenge Day 5)

swing challenge day 5

In day 5 of  the 10 days to master part-time swing trading challenge I show you how to manage risk on a macro level.

In other worlds, we need to not only manage risk for specific trades, but also our overall account.

The Concept: Managing Account Risk

Why do we manage risk for specific trades?

It’s because that trade does not exist in a vacuum.

It’s part of a bigger story.

That story is the growth of your account, and that growth can’t happen if your risk digs to deep of a hole in your account.

The Mistake Traders Make

Most ametuer traders almost exclusively focus on risk per trade.

For example, they decide that why will risk 1% per trade and think that’s enough.

Sure, it’s true that 1% risk per trade is a good rule. You can lose 10 trades in a row and still only lose 10% of your account. That’s great.

However, what if you are in 10 similar long positions and the market takes a nose dive. Not only that, but let’s say the market gapped down, making each trade blow through your stops so that your average loss is 1.5% per trade.

Now you just lost 15% of your account in one day.

If you have a $100,000 trading account, you are now down to $85,000.

That’s not acceptable.

You will blow up your account this way.

The Fix

Here is how you correct this mistake.

  1. Decide on a max risk range for you account at any one time (I like to keep it between 4-8 percent).
  2. Analyze the market and according to market conditions, decide which side of your max risk range to be on.
    1. In strong markets at the beginning or middle of trends, you can go toward the higher side at 7-8%
    2. In strong but overbought markets, you must be cautious of a reversal and lower to 4-7 percent.
    3. In weak markets, say toward the lower range.
    4. In weak but oversold markets that  are strengthening, you can increase risk.
  3. Add and subtract positions, and position size according to your overall risk parameters.

Watch this video for more on hanging overall account risk.

The Day 5 Exercise

Now that you’ve watched the video and understand why managing risk is so important, complete the following exercise

  1. Go to February 2, 2018 on the SPY chart.
  2. Pick 10 stocks on that day and assume you had entered before that day and  position sized and set stops according to 1% risk. (for example, AAPL, FB, GOOGL, AMZN, NFLX, NVDA, GS, X, FCX, TSLA).
  3. Calculate how much you would have lost with that overall 10% risk in place.
  4. Now adjust the account for better overall risk management.

Previous Posts

Day 1: Getting Started

Day 2: Analyze the Market

Day 3: How to Use Moving Averages

Day 4: Managing Risk and Setting Stops

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