The could be lots of differents ways to do Risk Management depending on your individual trading style. Two equally good ways might have almost nothing in common. But is you have ANY sort of Risk Management Plan, that you've carefully thought about & apply consistently, then you're probably ahead of at least half the traders out there. Best Regards, Miracletech
The post above is a correct way to do it, assuming no gaps. However, it show only the last variable to decide on. You still have to decide on the other variables, and the order in which to decide. As mention one needs to dead with gaps. How to deal with gaps: 1. Avoid them: Trade indices, do not hold over weekend, and have a futures trading account if you trade cash so that you can implement a stop via futures. 2. Use the stop that never fails (options). There is a process to follow in deciding on all variables in a rigorous manner. I interact with some folks, and I noticed that they have many flaws in setting up all these variables, and why they should do what they should do. Instead of repeating it, I decide to write up in a report, and give it to them. It made even my own trading stronger. There is so many subtle pitfall that if you do not know what you should do, in which sequence, and most importantly why, you will not be able to build a strong trading engine. PS: Some people may think that options can be expensive. They can but you would be surprised to discover that stops can actually be much more expensive than options. Do you know why?
I'll probably get reamed for this but I think it depends on the size in which you play with. For instance, I don't play with a lot of money for a number of different reasons, it's more of an experiment of mine, so I pretty much risk my whole account every trade. Pressure? yeah. But it does a lot of other things for me as well, force me to take good risk/reward trades and it also helps me to be more selective, etc. etc. etc. I don't advocate this method that I'm currently using, but I would advise that if someone wanted to use a "dollar amount" I would advocate to just convert it to a %. Thinking in dollars is more easier for most people to grasp than 1.23% or w/e. I would also agree with the previous posts of trading the chart, but you have to do it with respect to other things as well. Such as the index, is it in a zone where it is likely to reverse and your chart is saying an ascending triangle? The stock breaks out, then the market tanks, dragging the stock down causing a "false break out". It's just poor trading with respect to the overall market trend, stocks are following the market now more than ever, very few are actually moving of their own accord. Just my 1.23 cents. -troll