12.09.

2023, 10:44 TeachTrade - Technical Analysis and Market Commentary By Traders For Traders

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April 12, 101
Risk is inherent in trading, particularly when it comes to
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speculation. There are ways to limit and control risk, such as
and receive all the trading according to a plan based on technical analysis and
benefits of taking on positions in proportion to your capital.
TeachTrade
TRADER Within a particular trade, you must also control your risk. The
EDUCATION best way is to trade using stops (see Stop(s) and Go!) which put a
• The Ten limit on any potential loss should the market trade against you.
Commandments (See Adding to a Losing Position.)
• Devising a Plan
Risk and Reward These disciplines are based upon an essential truth in trading:
• Law of Averaging your risk and reward must be balanced. Whatever risk you face
• Stop(s) and Go must be more than compensated by the reward you reap. In the
• Margins and inverse, you should never take on a big risk for a small reward.
Leveraging
In fact, one rule of thumb used by some systematic traders is the
• Capitalization and
1-to-2.5 ratio. For every dollar that is risked, the reward must be
Expectation
$2.50. Why? Because not every trade is a winner. In fact, you
• Trading with a
may find that less than half of your trades are winners (See
System
‘Analyze Your Trades’). However, the profits from the winners
• What Happens to
far outweighs the losses – even when the losses are in the
John Q.
majority.
Public's Order
• OPTIONS - The Here’s a simple illustration:
Fundamentals
• Strategies You make 10 trades. Four of the 10 are winners. Six are losers.
• Delta and the What’s your bottom line? At first glance, you would expect that
Greeks you have lost money overall. But what happens if you adhere to a
• Psychological 1-to-2.5 ratio? On the six losers, you lost $1.00 each or a total
Profile loss of $6.00. You limited your losses with discipline and the
• Trading Facts strict use of stops. On the four winners, you made $2.50 each by
• Book Preview letting your profits run to your price targets. Your profit for the
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12.09.2023, 10:44 TeachTrade - Technical Analysis and Market Commentary By Traders For Traders

OTHER four winners is $10. Subtracting your losses, you’re left with a
FEATURES net of $4.00 – even though you lost money on 60 percent of your
• Put/Call NEW! trades.
• Market Calls
• Stock Picks Keeping the risks and rewards in balance requires a disciplined
• Bios approach and a strict use of stops. Keeping this risk-reward ratio
• The Weekender in mind at all times is essential to new traders, and must become
NEW! second-nature for experienced ones. If a trader takes on too much
• My Account risk – including hanging on to a losing position in hopes of a
turnaround – he or she is undermining their potential for success.
Better to take a small loss and move on to the next trade.

Small losses show discipline, and disciplined traders live to see

another day.

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