The Daily Market Forecast... your "risk number"
Friday’s Blog Results: You CRUSHED it! While the suggested long level stopped out, the suggested short level ran a WHOPPING 81.75 points to the next level where Team Members could buy the 4494.25 level and catch the bounce of 42 points to the close.
Today’s Trading Tip: The danger of losing too little.
Proper risk management is critical to your success as a trader. There are many aspects to this topic and AFTER you read this blog you should watch a recording of a class I did a while back called 7 Top Risk Management Rules.
This blog is about a new rule I’m adding to the class.
A popular formula for determining your risk on any given trade is the Fixed Percentage rule. You pick a percentage, usually 2% or less, and that is the most you can risk per trade of your trading account. It works great because as you increase your account your risk can larger giving you the opportunity for greater reward. Conversely, if you’re in a drawdown you will be risking less.
In the 7 Top Risk Management Rules class you are introduced to the concept of your “risk number.” This is the dollar amount you lose that bothers you psychologically. The 2% rule handles the money side of losing. The bigger challenge is managing your emotions. So, your “risk number” is the true maximum you can risk. In many cases it will be LESS than the 2% rule.
Most people will focus on the maximum they can lose to determine their “risk number.” But the LEAST they can lose is never considered. After all, if you can comfortably risk $500 on a trade why would you explore your feelings losing $100?
Here’s why you should: Losing too little is just as dangerous as losing too much. Why? Because when the amount you’re risking is too small you tend not to CARE. “Oh, it’s only $100, I’ll let it ride. I spent more than that on dinner last night.”
I like to play Texas Hold’em. Poker is similar to trading in that risk management is a critical factor. You pick the stakes you’re willing to play based on what you can afford to lose financially and psychologically. The stakes level will determine your potential wins and losses… and how much you CARE about the money.
If I play in a high stakes game I’ll probably lose. I’ll be too worried about the potential loss to properly execute my gameplan. I’ll chicken out at times when I shouldn’t.
If I play in a low stakes game I’ll probably lose. I won’t care about the money and I’ll start to do things that I shouldn’t.
If I play AT my stakes level, I won’t be worried about the losses but the gains are important enough to me to play my rules.
Trading is the same. You just won’t CARE about the rules if the stakes are too low. Make sure your “risk number” is not only affordable to lose, but the likely GAINS at that level of risk are ATTRACTIVE enough to you that you’ll focus and execute your rules.
Today’s Best S&P Futures Turning Points:
Short Level: Sell 4628.00 stop 4633.75 (5.75 risk).
Long Level: Buy 4527.00 stop 4522.75 (4.25 risk).
Trade Well,
Mike Siewruk
P.S. Join us every Saturday morning @ 10:00 ET for our weekly LookBack (5) trade review session. Every trade for the week is analyzed. Now open to the public. Meet the team. Ask questions. Register here for the December 11th session.