$10 Risk? Really Jared?
By Cliff Clark
How many times have we heard Jared preach those words in this trading room? I would say at least twice before the market opens and probably several times after that as each and every trading day rolls on. He usually says something like “If you are new, sit back and watch or risk $10 minimum”. You know what? He is right. But do you know why you only risk $10 and does this apply only to new traders? There's a question that you probably haven't pondered.
Well I am here to tell you that probably 85-90% of the traders in this room should be trading $10 risk. Who are they? Well here is a list with reasons you should be trading with $10 or reduced risk:
New traders with no experience – this is an easy one. You don't know what you are doing but you may have big plans for all the money you are going to make based on all the email advertisements that you receive promising you riches!
New traders just completing some training such as PTS – Why? You just acquired all this wonderful knowledge. It takes time to assimilate. Don't come out swinging for the fences.
Losing traders – Are you making money? How long have you been at it? Do you have a trading plan? Why are you still trading high risk if you aren't making money?
Trader's with no trading plan or a new trading plan – all three listed above probably fall into this category.
Trader's testing new strategies – If you have been trading for a while, you have a well defined trading plan, have been trading well and making money and decide it's time to add some new strategies.
With all of the above categories and there are probably others it all comes back to the trading plan. So back to the question, why $10 risk?
Well if you don't have a trading plan, you don't know what you are doing. You are gambling plain and simple. What's that old expression, “A fool and his money are soon parted”.
If you have a trading plan but you are a new trader with or without an education you have no idea whether your trading plan is going to work. I am thrilled that you took the time to pen a trading plan but now the real work starts. You have no statistics, you have to trade to gather these statistics. The way to do that is to use really low risk, $10! As you trade you are gathering more information which will indicate how well you are performing vs your trading plan. Along the way you will be making changes to your trading plan to improve it. As you and the trading plan progress you can begin to raise your risk.
The well seasoned trader when implementing new strategies or other changes to the trading plan should also consider using lower risk when trading those strategies. This is for the same reason stated above. Because you are successful with what you are doing now doesn't mean the changes you are contemplating will be as successful, so test them thoroughly before returning to your normal risk level.
When you are starting out in trading the goal is not to make money initially, it's to learn and develop a trading plan that will make you money in the long run. Who knows maybe all those emails you've been getting will be right. You could make millions, but it won't be from a magic formula, it will be from hard work and discipline.
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
