It’s been another wild week in the markets, with the S&P coming within a hair of an all-time closing high on Tuesday and Wednesday.
What’s more, Tesla stock moved even higher after the automaker announced a five-for-one stock split to take effect at the end of the month.
Now, if you recall just about a week ago we talked about Apple’s four-for-one stock split and what that meant for investors…
But today I want to continue our conversation from Monday about trading fundamentals.
In that issue, I walked you through the very basics of volume trading with Hawkeye, including a look at our primary set of indicators.
This time, though, I want to talk about something that many new traders overlook…
Most often to their own detriment.
I’m talking about risk management.
Now, if you follow trading news, you know that 2020 has seen the largest influx of retail traders in history.
The trouble is that oftentimes, new traders are attracted to the markets because they see it as a quick way to make some easy money…
And they don’t give enough consideration to the RISK that is inherent in trading.
Modern broker platforms like the popular Robinhood app don’t make it any easier, with their flashy marketing and gamified approach to trading.
But here’s a truth that I have said before and that I will continue to stand behind:
If you don’t have a documented trade plan that dictates every single trade you make — INCLUDING profit target and stop loss levels — then you are not trading…
You are simply GAMBLING.
Now, one of the first steps in developing your trade plan is determining your risk level.
Your risk level, as you may have guessed, is the amount of capital you are willing to lose on any given trade…
And it’s enforced by what we call a stop loss.
Stop losses are one of the most fundamental tools when it comes to risk management.
A stop loss is a predetermined price at which you will sell the instrument you’re trading and take a loss.
For instance, say you want to go long on a stock that’s currently trading at $20.
You manage to get in at $19.95…
So you set your stop loss at $19.90.
That means that if the stock price dips down to $19.90 or below, the stop loss order will kick in and your broker will sell the stock for you.
As you can see, this prevents you from losing too much on any one trade if it turns and goes against you.
Now, that’s all well and good…
But how do you determine where you should set your stop loss on any given trade?
Well, many traders use the one percent rule.
This rule states that you should never put more than one percent of your account balance at risk on any single trade.
So, if you’re starting out with a $5,000 account, the one-percent rule means that you would only risk $50 on any trade.
Now, depending on what instrument you’re trying to trade, a $50 risk may be somewhat limiting…
But, as your account value grows, you can start looking at position sizing, which essentially means increasing the number of contracts per trade while keeping your risk level the same.
We’ll talk more about position sizing… as well as take profit levels, which is the other side of stop losses, in a future issue…
But for now, if you want to learn more about how Hawkeye can help you get started with trading using a tried-and-true, methodical method that ensures you’re TRADING and not GAMBLING…