8/3/2019 busby_11_2_11

1/4

RISKInstitutional, retail, trend, swing, technical or fundamental regardless of what type of trader is at the other end of the mouse,

we all must take calculated risks to make money in the market.

MANAGE

FOR TRADING LONGEVIT Y

ByTomBusby

8/3/2019 busby_11_2_11

2/4

Some risks pay off in

rewards, and others are

realized through losses.

Having been deeplyinvolved in the finan-

cial markets for nearly

30 years, I have had the

opportunity of seeing

just about every method,

system and trading tool

out there. From the CEO

of a major Wall Streetfirm to the individual

trader managing his

own money, success

boils down to how you

manage risk.

Without an under-

standing of the risks in

the market, traders are

unprepared for the unex-

pected. What to ask be-

fore placing a trade:

-

ments can I make if a

KEEP EGO OUT OF IT

Repeat after me I am

not the smartest person

in the world. Say that

again three times, and

you will be on your way

to becoming a better

trader already. As soon

as ego gets in the way

of a trade, the blinders

go up, and the account

balance goes down. It isimportant to believe in a

trade and have convic-

tion, but not to the point

of no return.

I have learned to rec-

ognize where and when I

am wrong.

WHERE ARE

YOU WRONG?

By understanding that

you are not the smartest

person in the world, you

will be able to see when

a great trade setup might

actually be a bad trade

setup. It may be a great

trade setup, but news or

some other unknown fac-

tor can cause that trade

to go against you. Before

any trade is taken, I al-

ways want to know where

I am wrong on the trade

(meaning where I will exit

and take a loss).

THE CHARTS CAN HELP

Two technical things

that I focus on, regard-

less of what markets I am

trading, are support and

resistance areas in theinstrument I am trad-

Subscribe FREE to the

PFGBEST Perspectives On...

newsletter series!

Stay informed about

programs to t your personal

investment & risk prole!

There is a substantial risk of loss in trading commodity futures, options and off-exchange foreigncurrency products. Past performance is not indicative of future results.

8/3/2019 busby_11_2_11

3/4

instrument I am trading.

See Figure 1.

BE SYSTEMATICOnce those numbers are

plotted, I begin to build

a key number ladder and

look at where the instru-

ment is trading in rela-

tion to those areas. Then

I begin to look for recent

highs, lows or areas ofmajor support based on

a 30-minute chart (these

are known as market

generated key numbers).

I then compare the num-

bers from the 30-minute

chart to my historical key

numbers and set a stop-

loss order.If I am long when

the market takes out

those support areas and

gets below the daily or

weekly open, I know I

am in trouble. Regard-

less of what method

you use for support andresistance, always have

a point on the trade

where you pitch a trade

and take a loss. Stop-

loss orders are extreme-

Sources:DT

IRoadMap

FIGURE 1:Year Open as Key Pivot

1077.001086.001095.001104.001113.001122.001131.001140.001149.001158.001167.00

1176.001185.001194.001203.001214.00

1221.001230.001239.001248.001257.001266.001275.001284.001293.001302.001311.001320.001329.001338.001347.00

1356.001365.00

01-21-2011 03-18-2011 05-13-2011 07-08-2011

Key Pivot Area of Yearly Open

Note how the yearly open has proved to be an extremely important pivot (key number). If the E-mini S&P futures are below this area, I will managerisk by being very cautious on any long stock or options trades.

ing, as well as the overall

market direction.

Support and resistance

can be determined by ex-amining pivot points, Fi-

bonacci levels, previous

highs and lows and by

drawing just about any

kind of line on a chart.

When I find support and

resistance, I keep it sim-

ple. I look at importantopenings in the market

(these are known as

historical key numbers):

yearly, monthly, weekly

and daily opens of the

8/3/2019 busby_11_2_11

4/4

ly important to limit the

amount of loss.

DONT MAKE

THIS MISTAKE

Many traders risk a lot to

make a little. A trade is

taken with $500 worth of

risk to make $100. There

are some option strate-

gies (credit trades) where

a maximum risk might

be 4:1 or 5:1, but it is im-

portant to manage those

trades so that a full loss

is not achieved.

On more traditional

trade strategies, I typi-

cally recommend a risk/

reward of at least 1:1

(meaning if $1 is risked,

then the target should

be at least $1). If you log

your last 10 trades, take

a look at average gain

versus average loss. Cal-

culate what percentage isneeded to break even.

I would argue that most

traders losing moneywill have losses that are

two to three times their

amount of gains. When

setting up a trade:

wrong

right

-

ward ratio fits in with

your accuracy rate

BE PREPARED

Anticipate game chang-

ers. Never take a trade

that has so much size that

you are essentially all in.

If you go all in with the

markets, eventually some-

one else will end up with

your chips.

Consider economic

events that would affect

your position and how

you would manage risk.What happens if the mar-

ket gaps down? What will

that do to your stop, and

how will you react? How

can you hedge a positionif the exchange you are

trading on shuts down for

one reason or another?

PROTECT YOURSELF

To protect against game

changers:

market and different

strategies that can be

taken to hedge or pro-

tect a position

how to access the 24-

hour futures market

There is a saying in

trading: There are old

traders and bold traders,

but there are no old, bold

traders. The key is not to

hit the Lotto, but to con-

sistently take advantage

of setups when the odds

are in your favor.

Wait for the best op-

portunities, measure the

risk and then reap the

rewards.

Tom Busby is the founder and

CEO of the Diversified Trading

Institute (DTI).

25% OFF!Get FREE shipping & handlingon Roadmap to the Markets &

Trade to Win.

GO NOW >>