Page 404 - THE MARKET WHISPERER
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400 PART 11 - Risk Management
try to ensure that the distance between the entry point and the first profit
target is not shorter than the distance between the entry point and the
stop. In other words, you must try to attain at least a 1:1 ratio for the
quantity you sell.
When I worked as an entrepreneur in the world of hi-tech, I devoted
a good deal of my time to recruiting investments for the company I
established and managed. One of the most important facts I learned is that
“money needs to be recruited when it is available and not when it becomes
needed.” In day trading, as in hi-tech, we need to sell when buyers’ craving
is at peak, and not at its decline. True, sometimes you might see a stock
continue moving up and will regret selling too early, but generally the first
target point will be the only profit you will see from the stock. Remember
that after a strong upward movement, some traders will realize profits,
others will short based on the assumption that the stock will pull back, and
yet others are experts at shaking out. The function of this last group is to
shake out weak buyers and force them to sell by causing the stock to drop
below the entry point. I will generally sell 3/4 of the quantity I bought
after a rise of some tens of cents. In cases where the stock rises quickly
beyond my first target, I will wait for its first sign of weakness and then
execute a partial.
A common mistake by new traders is to trade in quantities that are too
small. If, for example, you bought 200 shares and your partial point is at
20 cents profit, how much will you sell? Since, as we have learned, you
are supposed to sell round figures of hundreds, you have little choice but
to sell 100 shares. This means that you will make just $20. For a stock
successfully breaking out, this is not enough, since the other half of your
quantity still puts you at risk. However, selling 300 shares from a total
quantity of 400, or 800 of 1000, already promises you good profits at the
partial point. Starting with a good profit early in the trade allows you to put
doubts and tensions aside and continue trading in the technically correct
way without having to suppress emotional reactions. I must say that I have
not changed my earlier recommendation to accrue initial experience with
small quantities of less than 400 shares per trade, but several weeks into
trading, the quantities you trade in must start increasing.
SMART Novice traders, unlike experienced pros, tend to exit a
MONEY successful stock too early, and a failing stock too late.
