BarroMetrics Views: A Process for Risk Management
This week, after one of the webinars I held, I received an e-mail from an attendee. He had blown so much of his account in two trades, that he felt distraught and afraid to trade.
I gave him some advice for the immediate future but I told him that for the longer term, if he was going to succeed, he had to create new habits of success. The discovery of Myelin shows that the old advice is correct: the best way to change old habits is to create new ones.
So here is a process I recommend for all traders:
- Work out an exit price beyond which you will not accept any more losses. This is your ‘dollar-uncle’ point. It is best if you determine this point from past results and the current setup.
- Work out your reward:risk ratio – historically and from the current setup. You want to ensure that the current’s trade ratio is at least equal to your historical range.
- Since I recommend that those using my methods apply the Rule of 3, work out the first third exit. Check out the price mathematically derived with the your chart. If selling, your exit should be below resistance, if buying. your exit should be above support.
- Develop your trade management plan. At the time you take a trade, using the Expectancy Return Formula, you will know how much open profit is noise. Once your open profit progresses beyond noise, start taking protective measures.
If you follow the above, you will never blow up in one or two trades.