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.
Here is how you correct this mistake.
- Decide on a max risk range for you account at any one time (I like to keep it between 4-8 percent).
- Analyze the market and according to market conditions, decide which side of your max risk range to be on.
- In strong markets at the beginning or middle of trends, you can go toward the higher side at 7-8%
- In strong but overbought markets, you must be cautious of a reversal and lower to 4-7 percent.
- In weak markets, say toward the lower range.
- In weak but oversold markets that are strengthening, you can increase risk.
- 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
- Go to February 2, 2018 on the SPY chart.
- 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).
- Calculate how much you would have lost with that overall 10% risk in place.
- Now adjust the account for better overall risk management.
Day 1: Getting Started
Day 2: Analyze the Market
Day 3: How to Use Moving Averages
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