Trade Aptitude

Results of Friday’s Best S&P Futures Turning Points: Neither suggested trade triggered.

Today’s Best S&P Futures Turning Points (consider wider stops and less size in fast moving markets): 

Buy 4485.75 stop 4482.00. Short 4543.75 stop 4548.25.

The World Sentiment Index: (+100/-100) falls from +21 to -14 in a world of mixed sentiment and low volatility. 

Catalysts: Nothing on the economic calendar. Earnings season slows. Waiting on CPI. 

Quick Tip: Lose Enough 

A popular formula for determining your risk on any given trade is the Fixed Percentage rule. You pick a percentage, usually 2% or less of your trading account, and that is the most you can risk on each trade.  

It works great because as your account grows your risk can increase giving you the opportunity for greater reward. Conversely, if you’re in a drawdown you will be risking less. 

While that formula is fine for the math side of the equation, it doesn’t address the psychological side. For most traders, at least until you’re elite, there is a dollar amount that bothers you to lose. I call it your risk number. Make sure you’re risking the lesser of the Fixed Percentage number and your personal risk number. 

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 about 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 may not care. “Oh, it’s only $100, I’ll let it ride. I spent more than that on dinner last night.” 

I like to play poker, and like trading 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 game plan. 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 take risks 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 may not 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.

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Trade Fearlessly,

Mike Siewruk