At NeverLossTrading, effective risk management is the cornerstone of successful trading. One of the most crucial aspects of risk management is adjusting your investment size according to the probability of different trading setups. This approach ensures that you are trading unquestioningly and making calculated decisions based on the statistical likelihood of success.
Risk in itself might be understood as a single entity; however, it results from multiple integral components that define risk-based trading decisions. These components include:
Elements of Risk-Based Trading Decisions
Risk Tolerance: This is the level of risk an individual trader is willing to take. Understanding your risk tolerance is crucial in making informed trading decisions. A swing trader should allocate between 1% and 5% of their capital to each trade, investing about 80% and keeping 20% for potential hedges.
Risk Integration: Incorporating risk into every aspect of your trading strategy involves considering risk in every trade you make and ensuring it aligns with your overall trading plan. A trading plan should have two components: An action plan explaining when to trade, a financial plan spelling out how often to trade, and formulation of return expectations. At NLT, we formulate a business plan for trading success with our clients.
Risk Assessment: Continuously evaluating the potential risks associated with each trade. This assessment helps in understanding the potential downsides and planning accordingly.
Risk Mitigation: Developing strategies to minimize risk. At NeverLossTrading, we teach how to repair the trade and turn potential losers into winners when prices reach the stop-loss level, and this was the basis of our brand name; however, never stop loss trading was a bit lengthy.
Risk Integration: Ensuring that risk considerations are an integral part of your trading system and not an afterthought means embedding risk management practices into your trading routine.
Trade Indication: Here, we combine the elements of signal strength with risk-reward appraisal as an integral part of the trading decision.
Trend Appraisal: This sounds simpler than it is. No, we do not draw lines between points and decide; we check for specific repetitive price patterns to define if we trade with or against the short-term trend.
Understanding Risk-Based Lot Sizing
Risk-based lot sizing involves appraising trading situations according to their probability of success and then adjusting the size of your investment accordingly. This method allows you to maximize gains when probabilities are high and minimize losses when the market conditions are less favorable.
Here’s a detailed look at how we implement this strategy at NeverLossTrading:
Probability Appraisal and Investment Adjustment
Our strategy involves evaluating setups based on their probability of success and adjusting the lot size (investment amount) accordingly. Below is a matrix showing how we approach different setups with varying probabilities:
How to Use the Matrix
Identify the Setup Category: Determine which setup category your trade falls into based on the potential price move indication, e.g., Power Tower, Swing Power, Trend, etc.
Determine Market Condition: Assess whether you are trading with or against the short-term Trend. At NLT, we define short-term trends by specific price patterns, called bullish or bearish cups.
Select the Setup: We like to trade when price indications correlate with breakout patterns like NLT Box Breaks, Cyan Zone Breaks, and Earnings Range Breaks. To read more about this, check our latest article on this blog.
Adjust Lot Size: Adjust your lot size based on the probabilities given. For example, if trading a Power Tower set up with a short-term trend at a Cyan Zone Break, you would allocate your trade size to the maximum risk tolerance.
Practical Application
For instance, let’s say you identify a Power Tower setup with a short-term trend at a Cyan Zone Break; you would allocate a maximum lot size. Conversely, if you identify a Swing Power setup against the short-term Trend in an Earnings Range, you would adjust your lot size to 79% of your max risk tolerance, reflecting a lower probability than the former setup.
Advantages of NeverLossTrading’s Approach
Precision in Trading: Using statistical probabilities, we reduce guesswork in trading.
Optimized Risk Management: Adjusting lot sizes based on probabilities helps manage risk more effectively.
Systematic Approach: Our strategies systematically evaluate and execute trades, ensuring consistency and discipline.
Enhanced Decision-Making: Our tools and indicators help traders identify critical price turning points, aiding in better decision-making.
Examples
Trade what you see by letting the chart tell when to buy or sell.
The following examples will show trade indications with buy or sell thresholds, and we only act when those are surpassed in the price movement of the next candle, ensuring that critical market participants trade in the same direction. Dots on the chart identify trade exit levels and red crossbars’ potential stops. Crosslines express borders of price containment areas, and we find a higher likelihood in the trade situation when the price moves out of such containment.
SBUX, Risk-Allocated Trading Decisions
On the earnings report, Starbucks missed expectations; the stock dropped, and our indicator painted an NLT Cyan Zone as critical support and resistance levels to engage trades border to border and at channel breaks when NLT Signals are confirmed.
Our indicators pained eight trading opportunities between 5/1 and 6/10/24:
Situation-1: the direction was not confirmed, and there was no trade.
Situation-2: no trade against the channel border, expecting buy orders at this level.
Situation-3: NLT Early-Up signal indicating a robust directional change, and the trade came to its target at the opposite border of the NLT Cyan Channel: 94% risk allocation, by this signal’s favorable risk/reward setup.
Situation 4: The target is outside the channel borders, not trade.
Situaion-5: Strong signal at channel break at a short-term up move: 100% risk allocation.
Situation-6: The signal was not confirmed, and we will not enter into a trade at the exit level of a prior signal.
Situation-7: No trade against the channel border.
Situation-8: A trade with the trend and a 73% risk allocation by not directly breaking the NLT Cyan Zone border.
IBM, Risk-Allocated Trading Decisions
The IBM chart shows four potential trade indications:
Situation-1: Two NLT signals show a potential for a strong reversal and for the price to pull back to the NLT Cyan Zone. The trade was confirmed, and by being a trade against the prior trend at an NLT PowerTower, we allocated 67% of the maximum risk.
Situation-2: Early-up signal, but by the NLT Cyan Zone Channel border being in the way of the trade, we passed.
Situation-3: NLT SwingPower Signal confirmed at a channel break with the newly developing short-term up trend, indicated by the Early up signal and price move prior; we allocated 85% of the maximum risk to this opportunity.
Situation-4: We are already in the trade, but if not, this signal allows for a late entry with the trend and a 73% risk allocation.
If you want to learn to make rule-based trading decisions at high-probability price move points, contact us for a demo, and we find out which system combinations suit you best.
contact@NeverLossTrading.com Subj.: Demo
As an NLT Top-Line user, you can scan the markets on your own for trading opportunities at crucial price turning points. However, we also support you with NLT Alerts, which list assets ready for critical price moves. We even integrate the chart situations for you and offer you a week of free alerts, with no strings attached.
contact@NeverLossTrading.com Subj.: Free NLT Alerts
Only informed trading decisions will lead you to produce the returns you expect to make from the markets, and we are here to support you one-on-one in forming critical trading decisions.
Conclusion
Trading is inherently risky, but using a structured approach to evaluate and adjust based on probabilities can significantly enhance your chances of success. At NeverLossTrading, we equip our traders with the knowledge and tools to make informed decisions, ensuring that every trade is backed by solid analysis and strategic planning.
Join us to learn how to trade smarter, not harder, by making the Trend your friend and managing your investments precisely.
contact@NeverLossTrading.com Subj.: Demo
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Thomas
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