Risk Management ANDREW AZ IZ SESSION 5

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1 Risk Management ANDREW AZIZ SESSION 5

2 Disclaimer BearBullTraders.com employees, contractors, shareholders and affiliates, are NOT an investment advisory service, a registered investment advisor or a broker-dealer and does not undertake to advise clients on which securities they should buy or sell for themselves. You understand that NO content published as part of the BearBullTraders Room and its Website constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. You further understand that none of the creators or providers of our Services or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

3 Risk Management Risk and account management has several aspects, all are important equally. 1. R:R Identifying proper risk to reward ratio set ups 2. Correct position sizing Depending on account size Confidence in set up Volatility of the stock: spread, ATR, etc 3. Trade management, identify trends and price action: keep losers small 4. Sound psychology and overall health 5. Mechanical risk management. Having plan B for: Platform, online connections, broker problem, PC or power outrage, etc.

4 1. Risk:Reward: Why it is important Day Traders should take trades with favorable risk to reward of 1:2 and higher. Why? Having loss is inevitable. It is part of the game, so you just have to turn statistics in your favor.

There are 18 black slots, 18 red slots and two green slots Your chances of

5 1. Risk:Reward: like gambling, trading is also a game of probability and numbers. There are 18 black slots, 18 red slots and two green slots Your chances of hitting a black or red are equal: 47.4%. Casino probability will be 52.6%, because of that two green slot. The 5.26% 'spread' is known as the house edge.

6 1. Risk:Reward: Why it is important Less accurate traders (higher number of losses vs winners) still can be profitable if manage the risk properly. High accuracy 60% Low accuracy 20%

7 1. Risk:Reward: Why it is important For a normal accuracy of 60% (4 wins, 4 loss) R:R ratio can make a huge difference! Same accuracy 60%

8 1. Risk:Reward Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

9 1. Risk:Reward Analysis Profit Target Daily level of $6.90 Reward Entry Risk Stop Loss Yesterday s Low Volume

10 1. Risk:Reward Analysis

11 1. Risk:Reward Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

12 1. Risk:Reward Analysis 200 SMA Profit Target 200 SMA Profit Target Reward Entry Stop Loss Risk Entry Risk Wait for the pull back, better R:R

13 1. Risk to Reward: Example of a Bad R:R COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

14 1. Risk:Reward Analysis Daily level of $ SMA VWAP Risk Stop loss Short Risk Stop loss Short VWAP Pre-market low Reward Covered in few steps Profit target Reward Profit target

15 1. Risk:Reward Analysis 200 SMA Previous day close VWAP Stop loss Short VWAP From 5-min 200 SMA 200 SMA Profit target Very often 1-min chart will give you a better view and entry.

16 1. Risk:Reward Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

17 1. Risk:Reward Analysis Very often 1-min chart will give you a better view and entry. COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

18 1. Risk:Reward Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

19 1. Risk to Reward: Chasing Stock: Bad Good trading idea, bad execution. Stop loss VWAP Short Daily level Profit target COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

20 1. Risk to Reward: Chasing Stock: Bad Good trading idea, bad execution. Stop loss VWAP Short Profit target COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

21 2. Position Sizing: How many shares you should take? How many shares I should take to meet my daily goal?

22 2. Position Sizing: How many shares you should take? How many shares I should take to make my daily goal? x Wrong question to ask. How many shares I should take to protect my account? Right question to ask. Position sizing rules: Account size: never risk more than 1 or 2% (depending on your aggressiveness). Volatility of the stock: trade small on volatile stocks, volatile moments of the day) Spread: always trade smaller size on high spreads. Float: lower the float, lower buying power you use. Number of shares might be higher, but used BP will be lower. Confidence in the set up: it is always better to take small size on less confidence set ups. You can always add more.

23 2. Position Sizing: are you taking same size on W and MSFT?

24 2. Position Sizing: are you taking same size on W and MSFT?

Share size: 400/0.4 = 1,000 share max. If you are more aggressive, use 2% rule.

25 2. Position Sizing: 1% or 2% Rule (shark bite) Do not risk more than 1% of your account on any single trade Lets assume your account size: $40,000 (not including margin) 1. 1% rule: $ Reasonable Stop loss: 40 cent per share 3. Share size: 400/0.4 = 1,000 share max. If you are more aggressive, use 2% rule. This is absolute number of share you are allowed to take. You may take less, but you may not take more! COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

26 2. Position Sizing: %6 Rule Piranha bite You are NOT allowed to lose more than 6% of your account in the last 30 days. If you are down more than 6% in the month, you should switch to simulator for 2 weeks. COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

MATERIAL: ANDREW AZIZ (C) WWW.BEARBULLTRADERS.

27 6% Rule: being eaten slowly by series of small losses 1% Rule: losing a leg or hand in one trade COPYRIGHTED MATERIAL: ANDREW AZIZ (C) Credit of Concept: Dr. Alexender Elder, Trading for a Living book

28 2. Position Sizing: Some failure stories

29 2. Position Sizing: some failure stories Too little simulator, too early live trading Too much size, blew up 45% of account in 1.5 weeks. What about 6% rule?

30 3. Trade Management And Risk Analysis A successful trade is the combination of EVERYTHING you learned so far. It is a fast decision making process! And yes it is hard! 1. Stock in Play: Correct stock to trade (Class 2) 2. Price Action: Balance of Power Between Buyers and Sellers (Class 3) 3. Levels: Support / Resistance Levels (Class 2) 4. Technical Strategies: VWAP, Reversal, Moving Average (Class 4) 5. Risk Management: Proper size, and stop loss COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

31 3. Trade Management And Risk Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

32 3. Trade Management And Risk Analysis Walking through a trade thought process. COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

33 3. Trade Management And Risk Analysis COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

34 3. Trade Management And Risk Analysis What happened? And how? COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

36 4. Sound Psychology in Live Trading Build your live account and confidence slowly. Start small (to have emotions in check). Avoid hulk days 4-6 weeks. Do not care about P&L and fees

37 4. Sound Psychology in Live Trading Be mindful of hulk days. No. 1 reason for failure of new and veteran traders. Symptoms: You are agitated. You look at P&L too much. You trade one stock too many times (revenge). You jump from one ticker to another. You have too many tickets. You are averaging down/up. You have no plan when entering in a trade. You hope to make all loses on one good trade. Treatment: STOP trading. Switch to simulator or go out for a walk. To not turn into a hulk: have a MAX LOSS per day. It is VERY IMPORTANT! DAS has risk control parameters (watch video)

38 4. Sound Psychology in Live Trading Have a Small Peer Support Group, and be in touch with them. Be in touch with few traders during the day. Text, WhatsApp, Chat, Forum, etc if you feel pressured or stressed. Desk traders who trade on the trading firms, they have psychologist on site! Private message in chatroom, ask in the forum or find someone in BBT local meet ups!

39 Profit Target: Grow Small Account with %1 daily net profit (after commissions).

40 Grow Small Account with Conservative Approach of % 0.5 daily net profit (after commissions).

41 Some Advise for Beginners Start small: Don t worry about commissions just worry about learning to trade the strategy and follow the process. Scared money is a lost money. Trade with money you can afford, but do not trade to lose it. Manage losing streaks. reduce the size when your account is dropping. Avoiding the gambler s fallacy. Do not go Hulk! Ignore time-based profit goals (ignore $200/day or $1000/week) Find your strategy: low-float vs mid-float? Believe in power of compound. In 9 months, you will grow your account 6 times, only with 1% a day. COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

42 5. Mechanical risk management. Having plan B for: Platform, online connections, broker problem, PC or power outrage, etc. William is preparing a series of videos on all aspects of mechanical risk management.

43 Good luck! COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

Day Trading Strategies. Day Strategies. and Examples. & Risk Management COPYRIGHTED MATERIAL: ANDREW AZIZ (C)

Day Trading Strategies. Day Strategies. and Examples. & Risk Management COPYRIGHTED MATERIAL: ANDREW AZIZ (C) Day Trading Strategies Day Strategies and Examples & Risk Management ANDREW AZIZ SESSION 4 Disclaimer BearBullTraders.com employees, contractors, shareholders and affiliates, are NOT an investment advisory