RULE NUMBER 1
The number 1 rule in share trading is Money Management. Professional traders call it risk management, but in truth risk management is more about acting in a certain way across all the different elements of the trade and the business, it can be as simple as thinking of were to move the stop to safely to reduce the initial 1% of risk to half, reducing risk where ever you can see it.
Let’s take a quick look at handling the risk. TradingLounge recommends risking less than 1% of your capital per trade and we have a suite of accounting tools to help you.
Here is the TradingLounge calculator to work out how many shares can be bought with our 1% risk, this is call Position Sizing.
Let’s say we have a $20K share trading account size and we can only risk 1% which equals $200 to risk on the trade. So we place in the Entry Price $19.26 and the Stop Loss price 17.23 into the calculator. Then place in the Dollar Risk amount (which is $200), and the calculator works out your Position Sizing (which is 98 shares to buy). If the Stop Loss price is closer to the Entry Price then you would be able to buy more, however there should be a good technical analysis reason within your share trading strategy why the stop loss price is where it is.
When I’m managing risk for the trades that I place out for TradingLounge members, my first goal is to reduce the risk from 1% to 0.5% I try to half the risk at the right time and second task is to get the trade to break even, I can also do this by taking some profit from the trade. But the main goal to allow the trade to stay with the trend.
Learn more about risk management here Share Trading.
In the Stock Summary below you can also see that the Share NCM will cost $1,887.48 to buy.
You can also see the cost if you were to buy NCM using CFDs: $94.37. At TradingLounge we use both shares and CFDs. The reason the CFDs only cost $94.37 is because the Deposit Margin is on 5%. I must point out that using CFDs comes with an overnight financing cost, which I find manageable; our Share CFD Portfolio can work out and track this for you on a daily basis
MANAGING YOUR TRADING RISK
In closing on money management, (the number 1 trading rule) Don’t risk more than 1% per trade, with a share trading account from $15 – 50K above 50K towards 100k start reducing the percentage risk in points to 0.5% at 100K , in summary if your new to share trading, then a $15 – 30,000 account risking 1% per trade is a justifiable start regarding amounts to trade. Next is getting technical analysis and trade step-ups working correctly.
How to catch the next wave in the trend
Markets are trends and corrections of different degrees and we really just want to trade the trend from one correction to the next.
Many new traders enter the trend too late, they simply do this because they know the money is in the trend and they just need to confirm that it is a trend and by the time they can see it as a trend, it’s too late as it’s due for a correction. So it makes sense to start building a trade from the correction, the probable here is more psychological, as they have worked out that, it’s the correction that takes the money from then, so they give it the wide berth. So what we are going to do here in a very simply way look at these trends and corrections and ask some basic questions.
Some share traders say the stock has a value to the current price and this can be party true, but I can say that the folks that trade the markets are emotional making the market an emotional mover and you can easily start to get to grips with this when you start to realize that markets have corrections at certain numbers, so in most cases you can look at large numbers as price and expect a correction at these price levels, eg $10, $20, 30, etc or even $1, $2, $3.
I have developed this concept further as the TradingLevels and you can read more and watch videos on it here »TradingLevels. We also have a charting program for you that applies all the levels.
TRADING LEVELS ... AS PART OF THE SHARE TRADE SET UP
As an example, we are using the popular ASX: BHP stock. I have placed an orange line at the $20 price level. In the Trading Levels we call this TL2. It is our understanding that markets can correct at large price points, so we trade to these levels and exit. Then we wait while the market corrects, because time is money in this game, and we simply wait for support.
The chart below shows the basic type of patterns that occur at price levels
So when looking at the TL2: $20 orange line, you can easy see when the market arrived at the 20 and you can see during the correction it tried to get above the 20 and find support, but it took time and then eventually it became the support, so then we can trade long off support and trade up to the next level in this case the $25 which we call the Medium Level, the 10, 20 and 30 are Major Levels.
The important point here is find a stock that has just finished a correction and then has developed support on that level, this is your saving grace. At TradingLounge we use the Trading Levels, Elliott Wave and Volume for developing our trades.