How I Manage Risk - Free Post

Investments, Swing Trades, Day Trades

Because this is such an important topic to me I thought it warranted it’s own post. If you have been here a while you’re well aware that I take extremely small risk, effectively never let a green trade go red, and I lock some kind of profit quickly. This is my personal style and may not suit everyone. Here I will outline how I manage risk across the three primary time horizons when I put my capital at risk. I will use an investment as an example, but I manage my swing and day trades exactly the same.

INVESTMENTS:

First and foremost, it is okay to turn an investment into a trade. The reverse is not okay to me. I tend to be rather selective when I put any meaningful size on an investment. I am looking for a company with great fundamentals and financials that I feel the market is undervaluing. This does not mean, however, that I simply buy at a valuation that seems reasonable to me. Valuations can be stretched absurdly far to both the upside and the downside and I see no reason to waste my time and capital holding a bag. I start to watch the name closely when the valuation becomes appealing, but I am always entering based on price action/technicals.

If you have been subscribed or following for some time, you have seen how much detail I put into a technical trade thesis. I apply this level of rigor, if not more, to my investment decisions. I identify an area of interest and begin to watch the name closely. I must see some meaningful sign of potential reversal developing (as I am buying pullbacks, and often deep pullbacks) and will literally execute my entry on a 5-minute chart. I have a very tight initial stop loss. Yes, I have stops for investments. They will be wider than more leveraged trades, but if my technical trade thesis is invalidated then I’m out and will wait for another setup. In many instances my risk is less than 0.5%-1% of the position (not my portfolio). Once I am green on the trade (it is a trade until major confirmation), I still lock some profit to cover a stop out so that my time and energy (think opportunity cost of capital) is not wasted.

Sizing

I will have decided ahead of time how much of my portfolio I’m interested/willing to allocate to the name ahead of time. This will vary depending on the valuation and my expectations for appreciation in the price. I’m generally looking for a 5-10% allocation to a single name, but will go higher (or lower) as well. I’ll use the range of 5-20% for the purposes of this explanation. To some readers this will seem overconcentrated and to some it will seem under-concentrated. This is of course one of the beautiful aspects of investing, we each have our own preferences and style.

Say my target allocation is 10% (as an initial weighting), the minimum exposure I want is 5%, and the maximum allocation I'm willing to take is 20%. If I have high confidence in the setup and really want the name, then I will allocate 10% of my capital straight out and risk a larger stop out (subject to the technical trade thesis). If I am less confident in the setup and slightly less enthusiastic about the name, I might start with 5%. In both instances I will average up (rarely if ever down) upon confirmation that my technical thesis was correct. The rest of the below will assume I have navigated into a full size position within the first couple of days of initial entry. I will reserve HOW I average up for a future post, which will also be free.

From here, since these are almost always “broken charts” on a technical basis, I will trim SOME part of my position. This would always be at a technical level as opposed to a certain % gain. My goal is to cover a potential stop out so the entire trade (since that’s what it would have been if I stop out) is at least breakeven. Say my initial entry on stock “X” was 1000 shares at $100 and my technical thesis would have been invalidated below $99. My initial risk is $1000. I might sell 100 shares of my position at $110 and leave my stop on the remaining 900 at $99. I’ve made $10 profit on 100 shares ($1000 profit) and if I lose $1 on 900 ($900 loss) because I stop out, then the entire trade remains green at $100 net, or 0.1% of my initial position. I may also raise my stop to even (or even higher) on the rest to guarantee the $1000 (1%) gain if any lower would represent a technical breakdown.

Managing trade continuation:

From here I will have some additional spots I’m looking to trim AND will start to layer in some small profit stops. These are ALSO primarily dependent on what would represent a technical breakdown and not based solely on a % gain. In the example from above, say it is trading $116 and I am planning on trimming another 10% at $120. Further, suppose trading below $113 would represent a technical breakdown to the point I would expect at least $110 to be revisited and possibly back to my entry. I’ll place a conditional order for 100 shares to sell at EITHER $120 or below $113 whichever happens first. The remainder will now stop even. After the first couple small trims I’m generally just monitoring the development of value on higher time frames and setting trailing stops on PARTS of the position below high time frame breakdown levels.

Maintaining this approach, especially the use of “conditional orders” (ie sell 100 shares at $120 or below $113) helps me to manage numerous positions across numerous accounts without looking at them every day.

Again, I use the same exact approach with even a 20 minute day trade on ES futures or SPX/SPY options. I get my stop covered as quickly as possible and take profits on the way up and trail stops either in profit or at breakeven depending on the specific setup.

While you’ve mostly seen my day trade precision, my approach to reading price works on all time frames and trading vehicles. Some examples would be my 2022 AMD entry at $55, my PLTR entry at $5.95-5.96 my 2023 ENPH entry at $76, and 2023 DIS entry at $79.61. The first 2 were shared on Twitter/X, and the latter two were shared here. The execution of entry, and the management of risk and profit taking is all the same approach as my day trades and as described above.