When to Increase the Risk in Your Trading

08/12/2009 12:01 am EST


Ron Wagner

Principal Partner, RevolutionaryTrading.com

All of the wonderful people who I have worked with over the years (including thousands of students) know that my wife and I both trade. Angel prefers holding for longer periods of time, whereas I prefer trading larger share size to trade for income in the shorter time frames. However, we both have retirement accounts, and so just for fun, we enter into small competitive wagers. A few weeks ago, I was gloating at how well I had done managing, selling incrementally into strength, and running profitable trailing stops on my positions. Mine were more intermediate-term holds. I trailed out profitability on my positions and did very well, but alas, the story is not over yet!

I’m chuckling right now to myself—even though I know I will lose this bet with Angel—that we are only doing what our method teaches. You see, it’s wise to always take advantage of trading and investing in multiple time frames…so we do. Where we might get stopped out on a profitable trade by implementing a trailing stop loss and moving it up on a daily chart, the weekly or monthly chart may be moving along just fine.

You can also use the longer time-frame charts to help guide you to hold onto your other shorter time-frame positions longer if the right conditions on the charts exist. Angel is great at reading the longer time frames, whereas I prefer the shorter time frames and want to tweak my positions or move up stops more frequently. The points I am trying to make are many, but the two main points are: 1) Make sure you have a plan to take advantage of market moves in different time frames, and 2) Know where you fit in as a trader or investor so you can capitalize on your strengths.

Although it looks like I will lose this bet with Angel (she still has about 60% of her position with a profitable trailing stop set), I am of course rooting for her. I’m rooting for all of you, in fact, as once you get the basics and foundational information you need to learn understood and implemented properly, it becomes easier to take advantage of the market moves that will always present themselves to those who know what to look for. Today I also want to talk a little about an important topic that will apply to everyone regardless of the time frame you may be trading.

In several other articles, I have talked about the benefits of paper trading initially, then moving to a small risk amount, and slowly increasing that amount in a very precise, planned manner until you arrive at the maximum risk amount you want to trade with. That is a long discussion, and one that has been outlined several times. Today I would like to discuss a question that comes up with traders who are past that point, and have been trading their risk amount, but who now want to increase that amount because they are doing well.

Most traders in this scenario move up the risk amount after a series of successful trades or successful days or weeks. It feels right, because they are trading well and have confidence, but this is generally a mistake, and there are a few reasons why.

First, there is an amazing statistic. I haven’t actually tracked the numbers, but most people will find that their best trading day ever was followed very shortly after by their worst trading day ever. How about you? What is the reason? Overconfidence or abandoning the plan that got you there and increasing risk amounts without more information?

The truth is that many will do well using a certain strategy, but then the market changes. This change may affect the strategy they are playing, and frustration sets in. It takes seasoning through a variety of market conditions and a trading plan that has survived market conditions before you start raising risk amounts.
And finally, one more reason: If you track your progress, you may find that you have strong rallies in your account, as well as some pullbacks. Just like the chart of any stock, you want to make sure that the pullback is a buyable one and is not so severe that it will hurt your account.

Once you have gone through a series of rallies and pullbacks in your account, and live through a variety of market conditions, and you find you are making “higher highs” and “higher lows,” only then is it okay to look to slowly raise those limits.

By Ron Wagner

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