Friday, May 11, 2012

Weekend Thread

Friday afternoon

Jamie Dimon
Risk is the only thing traders can control.   We choose how much (if any) risk we want to accept at any given time.  Any possible reward is subject to the whims of Ms. Market.

What is the proper amount of risk ?  Opinions vary, but most professional traders I’ve come in contact with recommend risking no more that ½% to 2% of your account on any one position.  Many daytraders (including myself) will also quit trading for the day if they lose more than, say, 1.5% on the day.  Larger values make it much more likely that the account will soon be wiped out.   Note that this percentage does not refer to “position value”, which could be a much larger percentage of the account.  Risk is the amount which would be lost if your stop is hit, barring overnight gaps.

Before entering a trade, it is essential to determine the price point at which you will admit that you are wrong.  The very first thing to think about is risk.  If the risk is too large, you should pass up the trade.  Don’t think about how much you could make - you have no control over that anyway.

As an example, let’s assume a $10,000 account and 1% max loss per position.  So we will risk no more than $100 on a position.

Looking at a $20 stock, first determine where the “wrong” point is.  Let’s say that support is 40 cents lower.  Give it a little breathing room and use a 50 cent stop.  In that case, the position should be no more than 200 shares ($100 / $0.50 risk per share).  The position value is $20 * 200 = $4000 (40% of the account), but the risk is only 1%.

For an options position which will be held overnight, consider the entire position at maximum loss and size accordingly.

Manage your risk.  Everything else will take care of itself.

FRIDAY MORNING


Good Morning Everyone! Well as you slept, the Chinese CPI data actually came in Stronger then estimates. Their Retail Sales and Industrial Production numbers missed estimates also. The miss on CPI data points to less of a chance of any action by the Chinese Government. Opec came out saying that Oil Inventories were higher and WTI Oil has pulled back to 96.20. Greece's third party is meeting tonight, the main parties in Greece must either form a coalition by today, or face a second General Election. So far, it appears the smallest party in the country’s parliament indicated that it was ready to join a pro-bailout coalition. The Democratic Left party has indicated that it may enter a coalition led by the centre-right New Democracy party and backed by the Pasok socialist movement. Pasok and New Democracy between them have 149 seats, two short of a majority. At this point, I don't see a deal in this mess...we will find out soon, plus we have a Spanish Bond Auction tonight.

For Today it is a BIG KEY MOMENT DAY, we have the SPX 1350 support (if it is taken out clean, then 1310.97 is the next fibo support), along with the WTI KEY 96.00 Oil Support and the KEY Eur/USD 1.2900 Support on our Risk Off Friday. After our day of rest on Thursday, it is clear sailing to take out all of these. German Elections on Sunday and EU Meeting on Monday are only major catalyst in near future. See what happens when you let a bear write for your blog, lol.