#09 Verily I Say Unto You Part One

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by Mike Lally

BALL_PURTrading is 80% psychological and 20% technical
BALL_PURYou must confront your personal idiosyncrasies
BALL_PURYou cannot survive in trading without limiting your risk
BALL_PURThe important elements of a risk management strategy are:
BALL_PURRisk-Reward ratio
BALL_PURDiversification philosophy
BALL_PURPosition size algorithm
BALL_PURMaximum risk per trade
BALL_PURStop-loss strategy
BALL_PURPsychology of adjustment after losses
BALL_PURYou must limit your losses to survive
BALL_PURYou control risk by controlling yourself
BALL_PURYou must have a written trading plan
BALL_PURDecision trees are useful to visualise the risk options
BALL_PURYou must know the time frame you are trading
BALL_PURYou need to consider all risk scenarios

BALL_PURThe greater the reward the greater the risk
BALL_PURThe greater the risk the greater the opportunity
BALL_PURIf you lose 50% of your capital on a single trade you will need to win 100% on your next trade to recover your position
BALL_PURThe probability of an outcome is the ratio of favourable outcomes to the total number of possible outcomes
BALL_PURThe mathematics of probability is at the very core of the management of risk
BALL_PURRisk management is the study of ruin
BALL_PURReduce your exposure to equities in a bear market
BALL_PURWhen making a risk decision your personal feelings play the most significant role
BALL_PURDetermine your maximum drawdown based on the performance of your system
BALL_PUREstablish a risk-reward ratio
BALL_PURDecision trees, expected value and expected utility are important components of risk theory

BALL_PURThere are two forms of risk the trader must consider:
BALL_PURRisk belonging to a company and Market-related risk
BALL_PURVolatility can be measured in many ways; three common methods used are:
BALL_PURStandard Deviation
BALL_PURAverage True Range
BALL_PURBollinger Bands
BALL_PURVolatility plays an important role in trading

BALL_PURYou can successfully reduce risk by diversification
BALL_PURCorrelation plays an important role in diversification
BALL_PURTrade your plan around your risk management strategy
BALL_PURThere must be sufficient liquidity to sell a stock
BALL_PURAim to produce a gradually increasing equity curve
BALL_PURYou must monitor your stocks every day
BALL_PURYou should determine the profitability of your portfolio periodically
BALL_PURThe even playing field is a trading myth
BALL_PURMartingale systems do not work
BALL_PUROvertrading will damage your account
BALL_PURDo not complicate your trading – resolve to keep it simple!

BALL_PURYour position size reflects your risk to reward expectation
BALL_PURExperiencing multiple successive losses will happen to you
BALL_PURRestrict your trading until you know what you are doing
BALL_PURWhen things go wrong take a break
BALL_PURProfessional trades restrict the risk premium to 1% – 2% of their trading capital
BALL_PURThere are many position size algorithms including:
BALL_PURVolatility method
BALL_PURPercentage of capital
BALL_PUREqual amounts
BALL_PURThe Fixed Fractional Model reduces the trading capital for each successive trade by the risk amount of the previous trade
BALL_PURThe Total Equity Model uses the trader’s full capital potential including profit from open positions and cash in hand

BALL_PURYou will not survive without a stop-loss
BALL_PURThere are many ways to set a stop including:
BALL_PURnearest support or resistance line
BALL_PURfixed dollar amount
BALL_PURpre-determined percentage amount
BALL_PURtrailing stop technique
BALL_PURplacing the stop below the pivot low
BALL_PURplacing the stop under last week’s lowest price
BALL_PURparabolic stop and reverse (SAR)
BALL_PURYou must know in advance the point where your analysis has failed
BALL_PURThe setting of stops is not a simple task
BALL_PURThere are many types of stops including:
BALL_PURInitial Stop
BALL_PURMental Stop
BALL_PURMoney Management Stop
BALL_PURBreakeven Stop
BALL_PURTrailing Stop
BALL_PURParabolic Stop
BALL_PURVolatility Stop
BALL_PURYou should move your stop to the breakeven point as early as possible
BALL_PURYou can adopt different stop-loss strategies for your trades
BALL_PURThe 2% rule is recommended for professional andd amateur traders
BALL_PURConsider taking a partial profit as a risk strategy

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