Use a Strategy (13:40)
Risk Management – Use a Strategy – Transcript
The bizarre thing about the risk management topic is that each sub-lesson is essential for risk management. That is also true when employing a strategy. What could be more critical to a trader than having a set of rules tested repeatedly to give you confidence that this trade will win?
Fifty percent of the time, and if and when it happens, I will make eight times what I’m willing to risk. That is completely insane. And it’s significant. and every professional trader on the planet Employs strategies So, now that we’ve discussed using, let’s talk about the importance of using a method for each plan you just saw. Behind the scenes, there was a plan to say, okay, my prerequisites are that I need a 30% increase in at least a day. I require a minimum of a 15% decrease—any volume less than ten million.
All of these requirements had to be met. Then it must be a specific asset that belongs to a particular class. Then you must decide, okay, what kinds of pullbacks do we usually get? Uh, a 236 pullback, a three, a two pullback, a seven EMA, a nine EMA, a 20 EMA, uh, whatever, even a five SMA.
All of that is worked out so that you, the trader, can decide, “This is where I’m going to enter.” This is where I’m going to leave. I intend to place my stop loss here to maintain that risk-reward balance. Far too often, traders will plan a trade with little or no strategy.
Many bad traders are perplexed by this because they use the excuse of a plan to replace the necessity of having a solid strategy. Allow me to explain. They’ll say no, but I’ve got a plan. I had a process. I was going to do this, and if it didn’t work out, I would sell here. That’s fantastic. Is that your strategy as well?
Because it’s unlikely that a strategy will be a strategy, this is how rules must be written into a system. You remove the emotion from your trading. You stick to the authorities. Buy you, buy you, says the strategy. Don’t even think about it. Your buy strategy says you sell, and you sell without question. You sell. Why.
Because you’ve already run that strategy through at least a hundred trades to determine whether it works or not, so you’ve eliminated the guesswork, which means you’ve increased the confidence in the actual trade. A strategy is a set of rules extensively tested in market conditions.
And prerequisites are almost always required. You can plan because you have a strategy. The transaction. Okay, fine. However, the strategy goes a step further by incorporating the knowledge of a win rate and then the confidence level, which can help you determine your risk per trade. Your risk per trade strategy, which we will discuss shortly, is used by every professional trader worldwide.
Remember that when we first started, very few things in the world were unanimous. Right. iPhones are superior. No, Samsungs are superior. No, Google is excellent. No, Yahoo is superior. Facebook is superior. No, Twitter is superior. It makes no difference what it is. There is always someone on the other side who will argue in favor of something just for the sake of arguing. Regarding risk management, professional traders all agree that risk management is by far the most important aspect of trading.
After that, a strategy would be used, but the strategy is part of risk management. Okay, fine. With the strategy in hand, a trader will know what conditional market elements to look for before putting together the plan. In other words, if the housing market is declining and this particular situation suggests, “Oh, you know, I might want to go,”
You’re going to look at the entire market and conclude it’s declining. One of my requirements is that the demand is rising or that we are trading at least a week above the 300 peers moving average daily. And only then will I consider incorporating all of those market conditions into every strategy because you can’t have a strategy that says, okay, well, it.
But only when the market is down, which is perfectly fine. That strategy is available to you. I retract my statement. That’s the strategy you want, but then you need another strategy that says, “Well, this works when the home market goes up,” and another strategy that says, “Well, this works when the market goes sideways, there’s no real direction up or down is just sort of a.”
This is where this strategy comes into play. So you’ll need multiple strategies. Okay, fine. The strategy will also assist a trader in determining where to set a take profit and a stop loss. So your strategy will determine your three main elements, correct? Your entry, exit, and stop loss. Okay, fine.
Those elements should be present in your strategy for constructing the proper. So, a trader can develop a plan with a strategy, but without a strategy, a plan is nothing more than hopes and dreams. I’m going to buy it here and hope for the best. I’m going to sell it here and hope for the best. So take a look at this real example.
We’ll go over the following slides together. Put yourself in the shoes of a trader and imagine what a strategy might look like. So. Let us examine this Strat. Oh, prerequisites, one very simple strat, and one reversal. These items must be checked off, or we will not look at the asset again.
Okay, fine. Now we’re on the hourly chart with dash U S D T. For at least 30 days; the price must be below the hourly 300 EMA. So the orange is the 300. Right. And as we can see over here, the price has been lower. So this is where everything fits because the price has been below that far, far longer than 30 days.
We’re ready to go. Okay. Second, the price must have a local breakout. So what a local breakout is will be up to that trader, but for me, a breakout, a very simple breakout, would be nothing more than simply breaking out of a trend. Or perhaps some moving averages. It was everything in this case. It was the trend line and the moving averages.
And it was local because it only happened here. It’s not like this was some huge breakthrough. This massive horizontal, it was this action over here that broke through very cool trading volume needs to be over 10 million. So, what’s your trading volume here?
Right. And then we saw that this point over here, you know, the big push up here, is 1.6 million. And you’re looking at about $157 per, so we’ve got plenty of cash over here. Everything is in working order. Okay, fine. So we proceed to the next one. Okay. My prerequisites have all been verified.
I now have rules. The fourth rule is to wait for the 200 and 300 crossovers. That’s all. So this is the same local breakout but magnified. The 200 is now green. The 300 comes in orange. The 200 surpasses the 300. As a result, we have a two-300 crossover number five. Wait for the RSI to reach 30 to 33, or somewhere in that range.
So here we have the crossover. Here’s the fifth. The RSI is right here on 30; the green dotted line. You’re ready to go. You have now progressed to the next step—the following rule. Wait for the 200 EMA to be touched. Isn’t it true that we just said the 200 EMA is green? So you let all of this happen. Everything has to happen. Everything has to happen.
You didn’t get in until right here, bang. You have a 200-level touch. Seventh, you go longer between the 200 and 300 EMA. S here’s the 200’s communication. Here are the 300. You have one, two, three, maybe four hours to buy to begin accepting according to your trade plan, according to your strategy.
All right, here we go again. It’s just been zoomed in a little. You can see that crossover, and that price was dangling over here by the hundred. Don’t be fooled by the proximity to 200. It did come down right here and hit the 200 mark. This serves as your entry point between the two and the 300.
So you’ve decided to enter the trade. H one 50 EMA falls below the 100. So, for the 50, the red must cross under the blue. In this case, we went long here, and we’re still long, despite this big high and that significant pullback, and then this new, big high and that significant pullback, because we haven’t gotten any reason to get out.
Another rule for getting out, right? The RSI falls below 33. So even if the 50 AMA crosses below the hundred, we have another rule in place that says, Hey, if that doesn’t happen, but your RSI breaks below that green level, really below 33, you’re out of the trade. The third rule to exit stop loss is your trail under the 300 EMA out of the trade and then the 10th.
So, regardless of what happens with the 50 and the hundred, regardless of what happens with the RSI, if the price falls below this 300, you’re out of the trade; that’s your stop loss. Because it is dynamic, that is a trailing stop loss. It will always move with the trade as long as it is active. The 300 will still be angled up, which means you’ll be moving that stop-loss every single day so you can, you know, profit, right.
Profit-taking guidelines. Number 11, if all conditions are met, we want to take 70% of our position out at the 50% fib of the big move. So, of the tr of the prior trend of the big previous high and your current low, I’m going to take 70% of my position out at the 50% fib. I’m going to take the remaining 30% of the position at the six one eight and call it a day.
That concludes the trade, and we can now view the entire transaction. We could see the entire trade from here. Remember that we have rules in place. Everything is in place over here. We have our prerequisites and our entry rules. We have our exit rules, and we have we take profit rules. This is a tactic.
This is a tactic. This is how you’d dial in, um, your aisle in, um, your strategy so you could develop a plan that you could trade-off. Right now, there is only one example. And, you know, you’d want to test this a hundred times in different market cycles, the whole nine yards, to be sure, okay?
It is successful 65 percent of the time. And if that’s the case, go ahead. That is something you should be on the lookout for so that you can adopt those characteristics. Consider the risk-reward ratio. And we’ll talk about it again soon, but your first take profit is at 110.
Okay. Your second take profit is currently 142 percent, and it’s difficult to see where the 300 is. The four-hour chart is shown here. So we’d have to return to the one-hour chart and see where the 300 was. But you were already profitable. We went back on this slide over here the last time we looked at it.
You entered from the bottom. You enter here and draw a horizontal line. Your stop loss is higher than your entry. You’ve already secured a profitable transaction. This trade cannot go wrong. And that is extremely important. And it gives the trader a lot of confidence. Okay. That concludes the strategy section.