Monthly Archives: September 2008

Business Risk Management – Rule of Three

Would you like to discover a quick and simple risk management strategy that is easy to apply to any trading plan, and has the potential to vastly improve results? Excellent!

I’m not talking about the placement of stop losses, which is what most people consider as ‘risk management’. Rather, this is a simple tool for managing the risk in your trading business.

Effective trading requires focus and discipline. There are many external factors that can interrupt your focus, and destroy your discipline, such as:

  • An unreliable internet connection
  • Your charting platform losing its signal
  • A knock at the door
  • The telephone ringing
  • A baby crying
  • Hunger
  • Noticeably too hot or cold
  • Fatigue (hopefully from late night trading study, rather than alcohol and party induced fatigue)

 

And as if that’s not enough, there are many internal factors that can also interrupt your focus, and destroy your discipline, leading you to make decisions and actions based on emotion, rather than following your documented trading plan. You’ve no doubt experienced some of these already. The internal factors would include things such as:

  • Hesitation in entering once price triggers an entry
  • Hesitation in exiting when price hits your stop loss
  • Doubt about your entry after entering the trade
  • Fear of exiting at your stop loss
  • Worry about how you will explain another loss to your partner
  • Any thought about an early exit of this trade, just to make up for earlier losses

 

There’s a whole lot more, but hopefully you get the point.

One flaw in many trading plans is the absence of a valid strategy for managing these risks. So, let’s fix that situation.

The problem is, traders have no guidelines as to:

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Support and Resistance 4 – Round Numbers

Welcome back to another installment of support and resistance.

The main chart features that I’m looking for in identifying support and resistance areas are the swing highs and lows, and areas of congestion. These have been covered in previous articles. If you haven’t seen them, please review them first:

1 – Support and Resistance – The Greatest Trading Tool

2 – Swing Highs and Lows

3 – Areas of Congestion

Today we’re going to have a quick introduction to another feature of the market which can lead to the development of support or resistance areas – round numbers. In analyzing a market, I never use this as a stand-alone method of finding support or resistance levels. Rather, it’s a factor which will simply increase confidence in an area already identified as support or resistance.

However, once you know to look for this, you’ll be amazed at how often a round number does seem to act as a barrier to price flow.

What do I mean by round numbers? Rather than develop a rule, let’s just look at some examples and it should become fairly obvious.

For a highly priced stock, it might be price in the region of $70, $80, $90, $100, $110 etc, or any multiple of $10.

For a mid-priced stock, it might be price in the region of $25, $30, $35 etc, or any multiple of $5.

For a low-priced stock, it might be any multiple of a dollar, such as $7.00, $8.00, $9.00, or even multiples of 50 cents, such as $5.50, $6.00, $6.50 etc.

For the penny stocks, you might look at multiples of 10 cents, such as 0.10, 0.20, 0.30.

Forex? Yeah, it works here as well. GBP/USD at 1.9600, 1.9700, 1.9800, and even the 50 levels 1.9650, 1.9750, 1.9850.

In fact, this concept applies to any market.

An important point before continuing – you’ll recall just a few paragraphs earlier that I said I don’t use this as a stand-alone method of finding support and resistance. If you did, you’d end up with a grid of evenly spaced horizontal lines all over your chart that would just get in the way of price. Rather, I use round numbers as:

  • A means of increasing confidence in the support or resistance areas already found at  swing highs/lows or congestion areas; or
  • If there’s no evidence of past support or resistance through swing highs/lows or congestion areas, then it simply provides a warning area. For example, if I’m long in a trade and it’s seriously overextended to the bullish side and approaching a round number area, I’ll expect some profit taking at this area and therefore potential resistance. So I might choose to lighten my position, or tighten my stops.

 

How do round numbers become support or resistance?

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