Hey traders,
A couple weeks back, I was giving a webinar for Trading Challenge students.
I was going over my February 17 trade on Signing Day Sports (NYSE: SGN), which we signaled in Seven Figure Cycles. (I previously covered that trade here.)
During the webinar, someone asked:
“How do you decide on [an] initial risk level? Was 30 cents just a simple whole number?”
Yes, exactly. There’s a psychology around simple whole numbers.
They naturally become support and resistance levels.
But there’s something more…
Check out a clean SGN chart from February 17, with only two lines (and a few words) added….
If my starter position was small, say, 100,000 shares at 35 cents per share…
And I was willing to risk between $15,000 and $20,000 on the position…
If it broke 30 cents, I’d have lost $5,000.
So, by taking a 100,000 share opening position, I only put on about a quarter of my risk.
Here’s my thinking…
I want that first risk level to be what I call my…
“There’s No Coming Back” Risk Level
If it broke 30 cents, there was ZERO chance I’d be rebuying it that day.
At 30 cents, I don’t think there’s any coming back.
That gives me a well-defined level…
That’s where I’m getting out, no matter how much I’ve sized-in to the trade.
My advice…
Make a “There’s No Coming Back” risk level part of your trading plan.
If you’re new to trading, set your risk level and stay disciplined.
If you’re more experienced and sizing into trades, STAY DISCIPLINED! (I hope this is getting through to you.)
There’s another risk level on the chart, so let’s look at that…
What if the stock broke 32 cents and bottomed at 31.7, or 31.6 cents?
At that level, I’m thinking…
There’s still a chance, right?
So, that’s what I call my…
“Still a Chance” Risk Level
And THAT is where patience comes in, guys.
I learned this by watching all of Tim Grittani’s webinars (and A TON of tape).
At THAT level it might be consolidating (or coiling).
I could sit on my hands, because I would know it hadn’t reached my “No Coming Back” risk level.
As the trade started going my way, I was thinking “Okay, this looks like it’s going to work…”
It was only THEN that I moved my risk up, to get more size.
At that point, I was convinced it was a winning trade.
The Takeaway
By taking only a quarter of my total position size to start, I lowered my risk (until I knew the trade was working).
That’s how I was able to make $28,768 (total starting stake of $145,040) with an initial risk of only $5,000.
Here are four simple steps to setting risk levels:
- Know how much you’re willing to lose on a position.
- Set your “No Coming Back” risk level at, or near, a whole number (based on the chart and setup, obviously).
- Take a smaller opening position, and only size up once you know the trade is working.
- Be patient if the stock hits your “There’s Still Hope” risk level.
Stay focused,
– Jack Kellogg
