Entry, Risk Management, Stop Losses, and Taking Profits in Trading (Part 2)

Jul 5, 2024

Entry, Risk Management, Stop Losses, and Taking Profits in Trading (Part 2)

Overview

  • Main Topics: Entry strategies, managing risk, setting stop losses, and taking profits.
  • Tools: TC2000 layout, risk calculator.

Setup

  • Stock Characteristics: Look for big move up, sideways movement, decreasing volume, higher lows, holding moving averages.
  • Five-Minute Chart: Key to observe on breakout day.
  • Volume Indicator: First five-minute candle volume is crucial.

Entry Strategy

  • First Five Minutes: Key to determining entry point. Wait for the first five-minute candle.
  • Highs of First Candle: Entry triggered when highs are taken out.
  • Stop Loss: Place at low of day.

Risk Calculator

  • Calculations: Will indicate number of shares to buy to risk 1% of account.
  • Formula: Risk / (Entry - Stop)
  • Example:
    • Entry at $5, Stop at $4.62, Account $10K, Risking $100
    • Calculation: (100 ÷ (5 - 4.62)) = 263 shares
  • Position Size: Should not swing more than 30% of account.

Managing Risk

  • Stop Loss Adjustments: Move stop loss from low of breakout day to breakeven after taking initial profits.
  • Breakeven Management: Ensures no loss once profits are partially taken.

Taking Profits

  • Price Targets: Determine by examining historical price struggles.
  • Multiple Attempts: Confirm resistance by multiple touches in historical data.
  • Scaling Out: Sell portion (half or third) of position 3-5 days in if no clear price target.
  • 10-SMA Rule: Exit entire position if close under 10-SMA (Simple Moving Average).
  • Example: Carvana position and its managed exits.

Important Tips

  • Risk Management: Never risk more than 1% of account.
  • Beginners: Start by risking 0.25%-0.5% to minimize losses while learning.

Next Topics in the Series

  • Part 3: Trading breakouts with options, including selecting strike prices, expiration dates, and managing risk with options.

Conclusion

  • Learnings: Effective entry point, risk management strategies, stop loss setting, and taking profits.
  • Preparation: Understanding these foundational concepts before moving to options trading.

Stay tuned for Part 3 where options trading strategies will be covered.