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Today’s Best S&P Futures Turning Points: Buy 5231.25 stop 5227.25. Short 5296.25 stop 5300.75.
Friday’s results: Neither trade suggestion triggered. The levels remain on the chart.
The World Index: (+100/-100) plummets from +50 to -7 with sentiment mixed on very low volatility.
Catalysts: Fed’s Jefferson & Mester @ 9:00. NY Fed Inflation Expectations @ 11:00.
Quick Tip: Big Risk Defined
Big risk is not in the trade itself. You have a stop loss to control that. Big risk is in the losing streak.
Billionaire hedge fund founder Bruce Kovner said “Novice traders trade 5 to 10 times too big. They are taking 5 to 10% risks on a trade they should be taking 1 to 2 percent risks.”
The key is to not apply the percentage to the price of the asset but apply it to your risk capital. Simple math. If your risk capital is $10,000, you should risk no more than $100 to $200 on each trade.
Your next decision is where your stop loss will be. If that stock you’re buying is $10/share and your stop loss is $1 away that would be 10% of the stock price. This is where position size enters the equation. To adhere to the 2% of risk capital rule, you should only buy 200 shares.
Here’s the reason why this works: At 2% risk you would have to endure 15 losing trades in a row to draw your account down to $7,500 (25% overall loss). At 5% risk you only needed 6 losing trades in a row. At 10%, 2.5 losing trades in a row.
Everyone trades to make money. But properly applying modest risk and position sizing is the most important decision. If you’re focusing on how much you could make and not how much you could lose in a losing streak, you’ll likely fail and certainly get emotional.
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Trade Fearlessly,
Mike Siewruk
P.S. Feel free to pass this along to your trading buddies. Share in the wealth!
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