Risk Management Part 2

In my previous post, I discussed the mentality one should adopt in order to manage their risk effectively. I also touched on how to adjust your order quantity such that your loss is calculated and therefore, reduces your uncertainty.

Today, I will be discussing another technique which I personally use for managing my risk. In simple terms, I close half my position when the price hits the mid point between my entry price (the price I buy/short) and the target price (the price I will close my position).  After closing half my position, I will move my stop loss to either just below the low of the day or breakeven, whichever is higher for long positions, or whichever is lower for short positions.

Let's go through the examples.

Example - Starhub

Lets assume you want to buy 1000 shares of Starhub at the price $3.34. Your target price is $3.5. You calculate the midpoint by taking ($3.5-$3.34)/2 + $3.34 = $3.42

After longing the position, the price eventually hits your midpoint price, you sell 500 shares and move your stop loss to the higher of either the day's low or breakeven. In this case, it is the day's low (note: place stop just below the low)

You keep adjusting the stop loss every day to move it to just below the day's low until you get stopped out or the price hits your target price.

In this case, the your remaining 500 shares for Starhub would have been stopped out at $3.42. It did not go according to your plan which is $3.5, but it was still a profitable trade. If you keep this up, you will greatly minimise the the losses that you will experience.

This strategy of course isn't the optimal strategy for everyone. You will have to access your personal risk tolerance and see if this fits in your overall strategy and goal.

I find that by having this strategy, there is a lesser chance my unrealised profits will be wiped out. Essentially, once the price hits the midpoint, I am guaranteed profit on the trade. You will have successfully removed all uncertainty regarding potential losses.

What a great position to be in wouldn't you say?

As always, happy trading.

Cheers.