A lesson on Trade Risk Management

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My trading motto is "Be clear on my trade set-up and risk-reward, AND find out the catalyst for current stock price movements".


Finding out the catalyst, as what I have mentioned earlier, is keeping up with market news.


When we talk about managing risk and using a risk-reward ratio, it is about HOW MUCH WE GAIN when we are right and HOW MUCH WE LOSE when we are wrong. 


First learn how not to lose, instead of how to win. Then we perform all that TA magic to find out if the ratio is satisfactory for us to enter a trade.


To control how much we lose when we are wrong, we need to have a stop loss or trailing stop loss in place. 


We could do a trade set-up and risk-reward BEFORE a trade fairly rationally. So we started off very convinced that we would make money. However, when time comes for execution and we are in the trade seeing the real price actions unfold, we often get overwhelmed by our 'kiasi' and 'gan cheong' psychology. Our MIND gets stirred.


Perhaps that's why Alexander Elder said in his book that we should start off with the prepared mindset of losing.


My messy trade recently is an example to remember by...


Plan: WB to play a longer time frame for the downtrend, BABA play a shorter time frame to trade bounce within the down trend channel.

Actions:

18/9 - SHORT WB at $73.50. ATR 20 at $2.10. stop loss $78.5

19/9 - LONG BABA (EQ) at $161.58 as hedge when WB position went into -$170. BABA still hasn't hit upper channel line. ATR 20 at $3.70

20/9 - BABA and WB rallied together in price. WB's leading the rally thus causing -$250 price fall from my short position. I am not sure how long the trend will last, and I don't want to set too small a stop-loss, I bought half the quantity of my opened position of WB (via WB EQ) at $77.38 to cover for my bleeding short position so that I can sleep with abit more peace. I am not going to stay up all night and panic.
Comment: If it breaks out above $80, cover all short; if it pulls back into the down channel, sell all the WB EQ.

21/9 - BABA EQ hit trailing stop loss at $167.25 (gain $162.12). 
WB stop loss increased to $82.70, if hit, sell the long WB EQ too. WB EQ stop loss set at $75, trailing 0.1.

24/9 - WB EQ got stopped out at $75 on pullback (lose $79.41). Bought 20 BABA at $161 as hedge since WB plunged today. Overnight WB short position stopped out at $75.70 (lose $141.90). $%%&^*#


26/9 - BABA closed with gain at $166 with a set take-profit (gain $91.97)


If I had stuck to my plans till now, the story would turn out to be quite different. Like a 事后孔明, you would say since BABA hit the upper channel I should short it then I would huat big big now right?



Yeah, that's how the market plays with our minds.

Don't laugh.




"Stupidity is fighting a trend instead of riding a trend. Worse stupidity is trying to ride a trend when it ends."

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Comments

  1. Singapore Man of Leisure10/10/2018, 12:43

    Rainbow girl,

    Wow! You put parochial Singapore stocks only old fogeys to shame!

    Trade China companies in US markets?

    Now that's the power of youth!


    I see you are using the Average True Range indicator; but you not using it to set your stop loss point?

    Messy is an understatement ;)

    18/9 Short Weibo using CFD; stop loss at $78.5

    20/9 Stop loss now at $80? Mental stop or mechanical?

    21/9 Stop loss moved again to $82.70 (OK, must be mechanical now)

    24/9 Something not right. How can your Weibo CFD be stopped out at $75.70?

    You moved your stop again!?


    I guess you know where you need to work on ;)







    ReplyDelete
    Replies
    1. Rainbow10/10/2018, 23:16

      Hi SMOL,

      I used about 2x ATR and put my stop loss slightly above the upper trendline for short (theoretically uh).

      I cannot recall what prompted me to mechanically move my stop loss to $82.70. Should have input more details in my journal, I know...

      On 24/9 after my WB EQ (equity long position) got stopped out from a pullback, I lowered my stop loss for WB short position. I scared the China company stocks rally continues - which it did in subsequent couple of days.

      Delete
    2. Rainbow10/10/2018, 23:17

      BABA taking the parachute this week. >.<

      Delete
    3. Singapore Man of Leisure10/10/2018, 23:35

      Rainbow girl,

      Of course I knew your intial stop loss point was using 2xATR ;)

      My "poke" is that your subsequent "adjustments" of your stop loss have nothing to do with ATR...

      If your trading mentor has free follow-up sessions, I'll suggest you go for your confession.


      If its any consolation, the first time I did pairs trading, I messed everything up too!

      Crash got sound!

      Don't let a good loss go to waste; profit from it :)


      P.S. US markets a sea of red now...



      Delete

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