The Daily Market Forecast... Lesson Day
Today’s Lesson: Sizing your trade.
Sizing is NOT determined subjectively. If you follow that path your performance will suffer (if you survive at all). The quantity of shares or contracts you trade is determined by 3 things:
- Stop loss amount.
- Size of your trading account.
- Your personal risk tolerance.
Most traders use a fixed percentage risk formula. Very simple math. You agree that you’ll never risk more than a certain small percentage of your trading account on any one trade. A common “maximum” is 2%. Beginners usually start with 0.5% and grow the percentage as you improve.
The main reason this works so well is this: if you’re doing well and growing your account you will be increasing your risk and likely reward, which makes sense. If you’re struggling or in a drawdown you’ll be decreasing your risk, which makes even MORE sense.
Now here’s the rub… you will have losing streaks and that fixed percentage formula can suddenly seem too high for your personal risk tolerance.
The “fix” appears simple. Drop the percentage. But this is a bandage. The correct sequence is to start with your PERSONAL RISK NUMBER. This is the amount that you can afford to lose both financially and psychologically. It’s the “number” that doesn’t bother you in the least if you lose it.
Now take this one step further. Once you have your “Risk Number,” divide by 4 or 5. THAT should be your per-trade risk. Divide that into your account size and you’ll have your fixed percentage to complete the simple, effective formula above.
For Tue 211019 (Plenty can change by the open, be aware.)
Globex Review: Price drifted up through congested levels with poor reward/risk yet produced 3 winners for 38.50 points before the one small loser. The one takeable trade that is still running never retraced to trigger entry. ☹
Day Session Analysis: Sentiment is mixed but price is ignoring the issues. Stats say shorts will prevail but buying is strong. Willing to trade either direction for now but mindful that a manic move up is possible. Tuesday (both sessions combined) garnered 20% of all the gains over the past 5 years in dollars. Reversals and Breakouts are about even. Trading ES/CL/GC using BB Rev with filters (download the new Edge). Cautious on credit spread ladders, interested in ITM spreads, though.
S&P 500 Futures CPL: 4471/4474. We’re trading ABOVE the CPL (short edge below, long edge above) and ABOVE the equilibrium 4464/4464 (open below = short edge, open above = long edge).
The World Index: (+100/-100) SOARS from -43 to +36 in a world of mixed bullish-leaning sentiment. Asia & S&P futures up nicely, Europe flat (shorts should outperform longs).
Catalysts: Housing Starts & Permits @ 8:30. Supply chain and inflation concerns persist. BITO, the first Bitcoin Futures ETF opens today. Risk on!
Trends: 60 min UP, daily UP (shorts should outperform longs). We broke through the last major resistance level before testing the all-time high.
High outside day: Win/Stop% about the same, shorts delivered 20% more profit. Opening around +0.50%. $TRIN XMA stable at 0.97. Long term outlook stays long.
Globex: The range of 32.75 (very likely higher by the open) suggests a day session range around 46 points on a FALLING ATR of 54.40. Prior forecast around 42 points, actual 43.
Trade Well,
Mike Siewruk
P.S. For a free “mini-course” packed full of lessons on HOW to trade the Blog… Watch this video.