Always Put Risk First

05/22/2012 3:30 pm EST

Focus: TRADING

Bob Weissman

Portfolio Manager, Minervini Private Access

Never enter a trade without first understanding the potential loss if the trade goes against you, says Bob Weissman. Putting risk first can also help traders find better entry points.

We’re talking risk with Bob Weissman. When we first discussed this, you said, “risk first,” and I thought that seems a bit odd since that’s what most people are trying to avoid. Can you elaborate on what “risk first” really means?

Sure. Really it’s a concept from Mark Minervini. Anyone who has read the Stock Market Wizard books has read his story and knows that he’s achieved phenomenal success. He did that not by swinging for the fences, but more importantly, by always looking at risk first before getting into a trade.

Ah, so this isn’t looking for the most risk; this is actually how to manage the risk.

Exactly.

I see. So how do you go about managing the risk?

Well that’s where you want to always know exactly what the risk is before entering the trade, and that’s part of our contingency plans. Every trader needs to have plans to accommodate and be prepared for anything that can happen.

The first thing that is very likely to happen is that the trade doesn’t go the way you think.

The first contingency is to have that stop loss established. Literally, write it down, put it up next to your screen, but more importantly, actually execute on it when it triggers.

Yeah, actually I heard with the Navy Seals, if they don’t have a plan B, they don’t have a plan A. It works the same way with trading as well. 

Are there any other things that you look at when you’re analyzing risks in the trades?

You want to know also your average loss. Know your numbers, and part of that is to understand what you average in your winners and what you average in your losers. You want to keep those ratios intact. You also want to make sure that you’re not getting outside of that range of what your results are.

We are always looking for a low-risk entry point within our trading; that’s part of our specific entry point analysis (SEPA) methodology. Our specific entry point analysis is finding that specific point where you’re going to have the maximum potential relative to the minimum amount of risk. That’s the whole blueprint, if you will, for Mark’s success.

I’m taking this that you’re analyzing risk regardless of whether you’re trading an index or whether you’re trading stocks; this applies throughout the board. 

Well, we focus on stocks and equities only. That is our expertise. That is where we feel like we have an edge to recognize and identify and analyze those individual names that are perhaps under the radar, but it doesn’t have to be with any certain specific criteria of stock. Any stock will do as long as it meets our criteria of what we’re looking for.

Do you have an example?

Sure. A trade that we did was Medivation (MDVN), which we took at the latter part of January. This is a classic example where the stock was up almost 200% in just the prior two or three months.

We don’t mind chasing a stock that’s already risen, but once it got to that point where it had that low-risk entry point, we had the ability to get in the stock with only about a 6% risk.

We then within only two weeks time got a 20% return in it, generating over three Rs on our trade.

That’s a classic example where we utilized that specific entry point analysis to get in with the maximum return possible relative to that risk.

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