Page 388 - THE MARKET WHISPERER

384 PART 11 - Risk Management

when you buy a stock, you must set your exit (stop) in advance. For example,
let us say that your entry point is at $30 and your stop is planned for $29.
If you buy 100 shares at $30 and the price drops by one dollar to $29,
you have taken a loss of $100. But if the maximum loss you are willing to
absorb is no more than $50, then you must limit yourself to buying only 50
shares and not allow yourself to buy 100 and “self-compensate” by setting
a stop at $29.50, which was not the correct technical stop in the first place.

In addition to the calculation you have set in advance, you also need to
understand that your actual exit point might be further than the planned
exit. For example, if the price dropped to $29 but has not yet executed a
five-minute reversal, you may have to absorb a greater loss than planned.
Therefore, you need to take into account in advance an additional margin
of error that allows you to operate correctly at the technical level and
wait for the reversal, while still preserving your planned reasonable-loss
framework.

Exposure-derived Risk

Part of the risk of trading in stocks derives from dependence on unknown
factors. These include political news, financial and market announcements,
company bulletins on the stocks you have bought, sector information,
analyst recommendations, and any other rumors that may affect price.
Since no one can anticipate the timing, content, or impact of any news,
the best way to reduce risks is to reduce market exposure time. The less
exposed you are, the more you reduce risk.

SMART The more you reduce exposure to the market, the more you
MONEY reduce your risks.

Since day traders operate with large quantities, they exit most of their

transactions during the trading day. Holding stocks means taking risks.

Swing traders buy smaller quantities and are therefore willing to take the

risk, which can last several days until they close part of the transaction.
But even swing traders will try to sell 75% of their quantity as early as
possible to reduce the risk of exposure to market mood shifts. Medium
and long-term investors who hold stocks for weeks, months, and years are
even more exposed. Conclusion: the more you reduce exposure, the more
you are reducing risks, allowing you to increase your trading quantity.