We target risk management convictions that I use everyday in managing my portfolio risk. The final target of the WCA Techniques is to maintain at least a 3 to 1 profit to loss ratio. This ratio is figured out by dividing your total profits by your total losses and is a good overall measure of reward vs risk.
In my 24 years of experience I noticed that successful risk handling can be acheived by following basics rules:
1) Don’t ever risk more than your original investment
2) Limit the size of your trading positions
3) Close out your losing trades before they grow into big losses
4) Don’t restrain your profits by selling winning trades with a low profit
5) Take both long and short trades
To achieve at least a 3 to 1 profit to loss proportion you must do sound risk control by closing out your losing trades before they grow into massive losses and by not proscribing your profits by selling winning trades with a low profit.
This defies human instinct as most traders must do precisely the reverse and take a fast 10% profit as quickly as realizable. People like the ecstasy linked with winning and will take a low profit though they're handing over a most likely bigger profit later by hanging on to winning trades. Most traders have an inclination to trade with little upside and unlimited downside. They will sell a stock when they've got a small profit but continue to hold losing stocks eventually winding up with a portfolio of losers.
A successful trader wants to reach the highest profit to loss proportion realizable. A heavy profit to loss proportion is a pointer that you are keeping trading losses to a minimum. Many traders with good trading systems fail because they don't pay enough attention to risk. Maintaining a trading discipline that causes you to target the idea of reward vs risk will help you become a successful trader.
When you establish a trading portfolio there's not any way to envision which holdings are going to provide giant profits over a period. Often if you're the owner of a diversified portfolio of let's say eight stocks, traditionally there are 1 or 2 of the 8 stocks that produce a big profit that accounts for virtually all of the gain for the entire portfolio. It is the big winners not the small winners that produce profit generating portfolios. You can't tell in advance which of the 8 stocks might produce a giant profit. So you want practice sound risk control and continue to cling on to the profitable trades and take little losses with losing positions before they grow into big losses.
If you39;re happy to risk 7% on a trade, then you ought to be expecting a 21% profit on your winning trades so as to achieve a 3 to 1 profit to loss proportion. If you39;re pleased to risk 10% on a trade, then you should be expecting a 30% profit on your winning trades which can regularly be tough to reach. Chuck Hughes way of concentrate on the idea of taking measured risks with each trade.
Also, if you have enough trading funds, do not risk more than 10% of your trading funds on any one trade. This is significant as it spreads your risk between 10 trades helping stop a giant portfolio loss if one of your trades experiences a giant loss.
Practicing sound money handling is critical for your trading success and is frequently neglected in the search for finding moneymaking trading systems. In my past experiences risk management is similarly as critical as trade selection. Risk management involves 1 or 2 steps:
1) Entering and exiting trades
2) Managing profits
3) Handling losses
4) Only take limited risk trades
Entering Trades
Chuck Hughes has only get a stock if the stock is on a MACD, Intermediate Term Trend or Major Trend System “buy” signal. And I can only take a short position in a stock if the stock is on a MACD, Intermediate Term Trend or Major Trend System “sell” signal. The purchase and dump rules for these systems will be covered in the following Chapter. When I choose to get a stock, I generally will purchase shares in increments over a 1 or 2 week period. As an example, if I want to buy 60 shares I'll be able to purchase 20 shares at a time till I have my full position of 60 shares.
Exiting Trades
Once I39;ve got a long or short position established I am going to be able to exit trades if the MACD, Intermediate Term Trend or Major Trend System reverses to a sell signal with long positions or reverses to a buy signal with short positions.
I shall also exit losing trades before they. Grow into giant losses even though there isn39;t any reversal signal issued from the Trend. Systems. As a rule, I39;ll sometimes exit a position before it incurs a 7 to 10% loss from my entry cost. As debated previously, if you are willing to risk 10% on a trade then you should be expecting a 30% profit on your profitable trades if you want to maintain a 3 to 1 profit to loss ratio.
Purchasing options gives you more leverage than purchasing stocks so a 10% price move for a stock can give you a 30 to 50% price move for the associated option. Thus Chuck Hughes will typically sell a choice before it incurs a 20 to 30% loss.
Taking tiny losses is crucial to your trading success as it may take years for you to recover from a massive loss. For instance, if your portfolio suffered a 50% loss it would most likely take a subsequent gain of 100% for your portfolio simply to reach a break even point!
Lets assume you had a $10,000 portfolio that sustained a 50% loss which finished in the value of your portfolio declining to $5,000. You would then have to attain a 100% return on your $5,000 portfolio in order break even with the price returning to $10,000.
Taking small losses before they progress into enormous losses has let me to maintain a better than 3 to 1 profit to loss proportion over the long term. The brokerage confirmations below show that I took a 13%, 9%, 13% and a 15% loss respectively for the 4 options trades listed which are good examples of taking little losses before they progress into enormous losses. I am able to take 1 or 2 small losing trades and still have a lucrative portfolio if one trade has great profits.
Investing, Chuck Hughes Trading System
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This post was written by admin on January 14, 2012
