Risk Control Cheat Sheet

Question: Toni, how do I manage my risk and keep myself in the game the longest? I am never certain how many shares I should take on a trade.

Answer: That's a VERY important question! A lot of traders I run into on a daily basis haven't the foggiest clue on how to manage their risk. Many take the same number of shares or contracts no matter what the security is or how far away their stop is and other take a stop with a security moves against them a certain amount, no matter what the setup or what the support or resistance levels are that will affect the security's movement.

Ideally stops should be placed under price support levels for longs (over resistance for shorts) and share or contract size should be adjusted so that each time a stop is roughly about the same amount. I do change it a bit now based upon the odds of a position, risking more on higher quality setups and in certain market conditions and less in more risky situations, but this should be avoided to begin with until the trader has a very firm grasp upon their style and abilities to judge market conditions and setups accurately.

To help you with knowing just how many shares are appropriate in a stock, I've included a sample of a risk control cheat sheet. I tend to round my share size to the 50 share level... such as 50, 100, 150, 200, 250, 300, 250, etc, etc... but when beginning I'd keep them as little as 10 share increments for the first few weeks of trading to establish a rudimentary system before increasing risk. Just keep in mind that if you trade odd lots (meaning not in 100 share increments) that it is NOT first come, first serve on the order books and it will be more difficult to get fills.



To submit your own question for me, just submit it via the comment feature or email me at toni at tradingfrommainstreet dot com.

All my best,
Toni