The best money management methods ...
- Thread starter CME_Trader
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Megaphone patterns or expanding triangles are reversal patterns. So, they generally should be used in that way. For a megaphone top you look for a break of the bull trend line THEN a test down to, or thru the MA, THEN test of the extreme prev high and then a bear setup. On megaphones the test of the extreme may end up being a higher high but it can also be a lower high. You watch the strenght of this test compared and contrasted with the previous test of the ma and if it is appearing weaker it may end up being a lower high and if it appears stronger it may become a higher high test of the extreme. At any rate, after the trend line break and the two tests one looks for a short setup. Once entered it is usually good for two legs sideways to down, sometimes more to the bottom of the megaphone. Of course, like any other pattern it will have failures. The main thing is to realize that one is looking for a reversal pattern at the top of the megaphone and not a continuation of the previous bull trend. You have to look to short when at the top and look to go long when at the bottom. NOT go long at the top and short at the bottom. The latter is generally a losing strategy with megaphones. For a bear trend same basic thing but inverted. So, a break of bear trendline, price trades up to or thru and tests MA (21 period m.a.) then comes back down to test the extreme low made previousley THEN you look for a long opportunity for two or more legs up.
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what are the best money management /risk management methods in our opinion ?
* Novice traders in general obsess with entry signals. Pros obsess with risk mgmt and put little if any value on trade entry signals.
* Novice traders in general size up ridiculously big so that a few losers in a row is game over. Pros size so that 10-20 losers in a row is just a draw down along the way.
* Novice traders in general have very unrealistic expectations and lack having a written trading plan - they drift from one method to the next acting impulsively. Pros have a well written realistic plan accounting for every aspect of the trading year and always follow it.
* Novice taders in general think you should trade a lot. Pros these days typically take only a few trades per day - or none at all if there are no setups. Trading frequency is a vital aspect of risk mgmt. Over trading wipes out accounts.
Risk mgmt has many components - to many to encapsulate into a forum reply. If you can think like the pro's that is a real good start. My avg risk per trade is under 1% per trade of my capital, as is my commissions each year. For every $1 I lose I am making more than $2 year over year - thanks to having a good risk mgmt plan and always following it.
* Novice traders in general obsess with entry signals. Pros obsess with risk mgmt and put little if any value on trade entry signals.
* Novice traders in general size up ridiculously big so that a few losers in a row is game over. Pros size so that 10-20 losers in a row is just a draw down along the way.
* Novice traders in general have very unrealistic expectations and lack having a written trading plan - they drift from one method to the next acting impulsively. Pros have a well written realistic plan accounting for every aspect of the trading year and always follow it.
* Novice taders in general think you should trade a lot. Pros these days typically take only a few trades per day - or none at all if there are no setups. Trading frequency is a vital aspect of risk mgmt. Over trading wipes out accounts.
Risk mgmt has many components - to many to encapsulate into a forum reply. If you can think like the pro's that is a real good start. My avg risk per trade is under 1% per trade of my capital, as is my commissions each year. For every $1 I lose I am making more than $2 year over year - thanks to having a good risk mgmt plan and always following it.
comagnum,
I have a few questions for you:
1. When I am trading options or swing trade equities with a sizable account, the 1% rule is quite reasonable. But if I day trade and is a novice starting out with a small account, trades < 1-2 times a day and risk 1% each time, slippage can be significant and can I make enough to make it worthwhile? e.g., for a $1K account, 1% is $10. How hard is to day trade stocks with only $10 spend each time I trade? How can a novice overcome that?
2. A lot of people here talked about Risk Management but few gave specifics other than made general statements. I am not looking for a recipe but a set of rules, guides of what should Risk Management include? For example your 1% and don't over trade rules are very helpful.
3. And how rigid should my plan be? Should I include my "judgement" at the time I risk manage, or should I follow a rigid set of rules and not deviate?
I enjoyed reading your posts and appreciate you taking time to answer.
Regards,
I took me abit to draw and write it up so I missed the reversal back up that followed. The chart isn't the clearest as i trade on my laptop but could not get windows 10 to send my email snapshot of my drawing so i had to take a picture of my laptop screen with my IPAD and upload that image. Perhaps the quality is good enough. One thing I failed to annotate on the chart was that after the trendline is broke i prefer to see the 21 period m.a. tested. That is, touched, or close to being touched, or even traded through as that indicates selling pressure before the extreme is tested on the subsequent minor rally. It WAS touched two bars after the break of the trendline counting the b.o. bar.
The red dots are my short entry price in each trade. The dark blue dota are my initial stoplosses for each trade. They define my initial risks. However they are subject to change as the market goes my way. The change then becomes my true risks. This affects my exit placement. Once i know my true risks i set my profit target or just let it run until it appears the move is over. On high probabilty trades one must not follow the market too far for a bigger profit simply because if the probabilty is high and the risk is low then the reward usually cannot be very big because some institution or really smart trader is simply not going to let it be very big. The green dots are my exits.
One further note on wedge tops. This wedge is indicated by the two gray lines. Anytime you have some weakness in the background like the two large bull bars that started the breakout but then immediatley were followed by 3 bear bars in the pullback ...well..while it was a b.o. it did show some weakness therefore the wedge pattern that subsequently formed had a higher probability of leading to a reversal. Plus the 3 bull bars in the test of the extreme high were overlapping and had tails on top...all that indicates some weakness in the rally up to test the extreme. But, if this initial b.o. had been say 3 or 4, or more, large bull bars with little or no p.b. and little or no overlap and little or no tails on top then the odds of any subsequent wedge top turning into a reversal becomes less. In other words, in very strong b.o.'s 3 pushes up in a wedge can quickly become 4 or 5 or even 6 pushes up before the wedge top morphs into a reversal. Furthermore, if the b.o. is extremely strong then one wedge can start a second wedge...and a third wedge ad naseum. To judge correctly the probability of a wedge top morphing into a reversal one must study the background. That is, in what context did this wedge top form?
I got my numbering wrong on the text boxes but i dont want to redo them and take another snapshot. So.....the megaphone text box should say 1. The lower text box 2 number is correct. The upper text box2 should say 3. The reversal box should say 4 and the final box at the bottom should say 5. I number the boxes to give some continuity to my annotations.
Hope this help and not harms. Perhaps someone will appreciate my artwork and explanation! If not, then just ignore it.
Good luck trading. It does take alot of work though. Seems like i once heard "the harder i work the luckier i get"
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You notice price traded thru bottom of megaphone. Next trade i would be looking for a reversal back up towards the top of the megaphone, but it may not go far. possibly going long around my exit of the third trade. I just don't have time for any more trading today. I will see what happens in a couple of hours.
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This guy gets it ....