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This is a very tough market that takes considerable skills to master. In
Monday's column, I discussed the reasons why controlling risk in this environment works a lot better than chasing profits.
Today let's expand on these concepts so you can put theory into action. Here are 25 ways to improve your risk management skills:
Visualize the best and worst outcomes for each trade. Then have an exit door ready at all times in case things go haywire.
Time affects the reward-risk ratio as efficiently as price does. Reduce position size when time signals don't line up well. Watch the clock and become a survivor.
Good timing on bad stocks will make more money over time than bad timing on good stocks.
The best signals converge through many types of analysis. Pull up moving averages, Fibonacci retracements and Stochastics. Then see where they intersect.
The best trades come when the crowd leans the wrong way. You can't see this happen if you're stuck in the middle of the crowd trying to get out.
Here's the real Holy Grail: Don't trade when you can't measure your risk, and stand aside when you can't find your edge.
Let your winners run, but only when the markets are running. Don't overplay your hand in a choppy market.
Keeps your costs down. A fascination with expensive software and fancy workstations will undermine your trading performance, not improve it.
Learn how to take "good" losses and enjoy it. Realize you can rebuild your capital no matter how far into the hole you fall.
Stop looking for a perfect formula that works in all situations and never hurts your ego. If you can't stop doing this, you're better off learning how to knit or play video games.
Reduce size when your losses are too great for your emotions. Watch out when you eat, smoke or drink too much because of poor trading results.
Drawdowns are natural events within the bell curve of performance. But it takes skill to know when drawdowns can be ignored, and when they're telling you to change your ways.
Keep a profit-and-loss summary available, preferably in real time. It represents the bottom line that illustrates the sum total of your trading skills.
Forgo mediocre positions and wait for the best opportunities. Expect long periods of boredom between frantic surges of concentration. Stand aside, wait and watch when the markets have nothing to offer.
Equities move through narrow bands of activity, interrupted by periodic thrusts toward the extremes. Place your stops away from these noisy boundaries whenever possible.
Don't place stops at common hot spots such as trendlines or round numbers. They're easy to hit, especially before price jumps in the other direction.
Trade setups work best when several time frames are combined to identify all of the debris on the charting landscape.
Visualize what you expect to happen with your position and then follow the action to see if reality confirms your expectations.
Use the tape to make your most important decisions. It often does a better job forecasting direction than a chart or a pattern.
Price action doesn't reward cookbook strategies. Develop an original view of the markets, and then trade it ruthlessly.
The most successful traders focus on price and volume. Everything else is secondary.
Enter positions at low risk and exit them at high risk. This parallels buying at support and selling at resistance, but it can also be used to trade momentum.
Exploit market quirks in your entries and exits. Events like overnight gaps and options expiration can benefit positions rather than hurt them.
Cross-market analysis reduces trade risk. Use index movement to buy or sell stocks that haven't triggered entries through their own signals.
Consider the impact of the last price bar on evolving reward-risk ratios, adjust your plan accordingly and then use trailing stops to protect the position.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called
HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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