Preserve Capital

RISK MANAGEMENT: PRESERVE CAPITALl before dreaming of making consistent and huge PROFITS.

Familiar with the quote “risk only the amount you can afford to lose”? Wow! Does it mean If I have a capital of RM50k, in order to be involved in the stock market , I have to be prepared to lose them all ? Does it mean if I bought any shares for say RM10,000, I must be prepared to lose all that RM10k ?

Eiyaaa be logical larrr…in order for me to lose all that RM10k, I have to watch helplessly the stock tumbling down to zero or until the stock get delisted ? will you allow that – watching helplessly your stock tumbling down? CRAZY ! no larrrr kan = we are not that insane to do that, we are like PRO Traders oso, we will intervene –stop the losses.

The question is how much losses are we willing to tolerate ? Some say up to the level that we can still feel ‘comfortable’ and boleh tido malam peacefully - That is our RISK TOLERENCE. Tapi biasalahhh, what get measured get done…. Damm ! QUANTIFY IT UPFRONT- how much of your capital you are prepared to lose in any one trade. if we don’t define our RISK TOLERANCE UPFRONT – the chances is that it will not get done and we will ‘unconciously’ joining those insane folks.

RISK TOLERANCE How much.... % of your capital ? What! , 20% of your capital per trade ? do you know that with that kind of risk level, your Capital will be wiped out, if you have a 5 losing trades in a row, ? NO MORE MONEY NO TRADE… lahhh period.

Hey! would you believe if I said that most Pro traders risk < 3% of their Capital per trade ? at 3% capital risk per trade means one can afford to have 33 losing trades in a row before the capital get wiped out.... In fact to some, risking 3% of their capital is too much. If they use 1%, they can afford to have 99 lose trades in a row before get capital wiped out. What do you think the probability for these Pro to lose 33 trades or 99 trades in a row ? hey!, what about yours !what's the probability for you to suffer 33 lose trades in a row ? Low isnt it.... then, wouldnt you like to adopt this money management strategy - where the risk of getting wiped out is low ? you decide, what is your risk tolerace per trade express in term of % capital. or nak quote in term of RM pun ok larrrr.

Well!, it should be noted that it doesn’t mean that since we can afford to lose 33 trades or 99 trades in a row we need to continue trading until 33 or 99 times after experiencing a series of losing trades in a row, without intervention and check and balance in between , if we did that it will be too late for us , no more money left. NO MONEY MEANS NO TRADE.

Most professional traders would stop trading for the month, and some even close all positions if they had 5 losses in a row. This will give them time to recuperate and to review their trading habits and methods to find out what they have done right and what they have done wrong, and making preparation for the next trades. By doing this they are able to minimise their capital erosion (the technical trading word is 'capital drawdown' to only 5-15% of their Capital- they still have plenty of money left for the next trades.

Definition of risk. For TRADERS, RISK (the amount we are prepared to lose) is defined as (ENTRY PRICE – STOP LOSS) x position size i.e number of shares bought., cant use the terms ‘position sizing’ sparingly, as it is the trademark of Dr Van Tharp.

Of course lahh , by definition if we don’t have a STOP LOSS position, the RISK equation will become Entry Price x No of shares bought , i.e this means we are prepared to risk the whole money we use to buy that particular stock okkkkk. By definition, If one decides to use a wider stops, the one need to reduce the number of shares bought in order to maintain the same amount of CAPITAL RISK (the amount we are prepared to lose if we are wrong) per trade. In order not to be knocked out by the 'noises' there is a need for one to place the STOP LOSS position at where the price structure / trend violated.
It’s a free world, we define what our risk tolerance is and be responsible of the exposure that we are subject ourselves to.

There are many ways to manage the CAPITAL RISK, the following examples illustrate some of them; for a single position and for multiple positions at any one time.

EXAMPLE 1: controlling risk through position sizing: iN this example assume a single open position at any one time, total Capital =RM50,000 and risk tolerance 3%.
Capital = RM50,000
Risk tolerance per trade (CAPITAL RISK) = 3% capital = 3% x RM50k = RM1,500 ( this means we are prepared to lose this amount per trade if we were wrong)
Assuming our entry rules shows that RM1.00 is a good entry level for the stock and the our stop loss position below pivot is at 90 sen. Therefore our TRADING RISK is 10 sen or 10%. Of entry price.
In order to maintain our Capital risk tolerance of RM1,500, we should not buy more than RM1,500/0.1= 15,000 shares of that stock. Should we want to use a deeper stop loss, then by definition of the equation, we need to reduce the number of shares we wanted buy, until the risk is maintain at RM1,500.

EXAMPLE 2: For Multiple stocks at any one time, capital RM50,000 and risk tolerance still 3% capital per position or trade.
In this situation, I suggest we divide our capital into 5 equal portions. This means each portion is RM10,000. Buy a stok up to this maximum amount. We can still control the risk up to 3% Capital per trade by limiting our STOP LOSS (TRADING RISK) not more than 12% of entry price. Why 12% not 15% ? well I have taken into consideration for possible slippage+ transaction costs …he he he.
Anyway make sure your stoploss position is placed below the last turning points/pivot/your trailling stops. (this is to indicate that if it is triggered it means the price structure or trend is changing)

Ok larrr I am tired already…but whatever

KNOW AND QUANTIFY OUR RISK TOLERANCE- express in term of % of TOTAL CAPITAL

And remeber, to TRADERS like us, RISK = (ENTRY – STOP LOSS ) x NUMBER of shares ... not anything else.

tak jadi PRO TRADER pun tak apa... tapi trade like them pun ok laaaaa
TRADE LIKE A PRO- BE DISCIPLINED

"Professionals take a trade when they are comfortable with the risk, while amateurs do it when they like the potential profit." - Vadym Graifer and Christopher Schumacher


read this article on STOP LOSS
http://www.yourtradingcoach.com/Articles-Risk-Management/Tight-Stops.html

see these videos on the right way to place STOPLOSS POSITION
http://www.youtube.com/YourTradingCoach#p/u/10/Q42PGn7B8jM

how to trade breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0

http://www.yourtradingcoach.com/Table/Videos-Risk-Management/

http://www.yourtradingcoach.com/Table/Videos-Money-Management/

happy trading!