Tag Archives: trading

Top 5 Risk Management Tips

Your survival as a trader depends on how you manage risk. The single most important aspect of trading is risk management.

Risk management is boring, overlooked by newbies, and ignored by the greedy. Greed without risk management will wipe out your account. The fact is traders have losses, even the most experienced traders. The difference between newbies and experienced traders is how they manage those losses.

If you are new to trading and you read only one thing on this website, then it should be this. The importance cannot be overstated.

Here’s a Fibonacci 5 risk management techniques:

1. Never ever risk more than 3-5% of equity on any one trade.

This rule ensures that with a series of 10 losses in a row a traders account will still have sufficient equity to be able to continue trading. While a series of 10 losses in a row is never expected and never a goal, it is a worst case scenario that must be considered. Would your account survive it?

2. Always use a stop loss.

What would the market have to do to prove you wrong? What is it that you think the market cannot do? Set your stop loss accordingly. Stops could be set just beyond Elliott wave invalidation points, just beyond an important prior high or low, using a trend line or a moving average.

Stop losses should be an order but may also be mental. If using a mental stop loss, the trader must have exceptional discipline to execute it at exactly the time emotion will be against you.

3. Exit a trade as soon as you recognise it has gone wrong.

Sometimes this happens before a stop loss is triggered. Sometimes market behaviour is not what you expected. This may be in terms of wave structure, volatility or anything that looks wrong. If it looks wrong and isn’t what you expected, then exit the trade promptly.

4. Don’t meet margin calls.

Experienced traders view margin calls as an objective indication that the trade has gone wrong. It it gets this bad, stop throwing good money at it!

5. Adjust position size to meet rule 1.

The importance of rule 1 cannot be overstated. Rule 5 really is a repeat of rule 1. Never ever risk more than 3-5% of your equity on any one trade. In order to keep this rule then of course a stop loss order must be used, otherwise potential risk is 100% of your equity. So really, rules 1, 2 and 5 are all the same.

When calculating equity take the value of your account minus all potential losses on all open positions. That is available equity for the next trade. Calculate 3-5% of this number and you have the amount which may be risked on the next trade.

Calculate the potential loss for a trade from the open price to the stop loss price (most trading platforms will do this for you). To keep this potential loss within 3-5% of equity adjust the size of your position.

Finally, one extra tip which is one of my personal favourites. When a position becomes reasonably profitable move your stop loss to break even or just beyond to protect a very small profit. In this way I have turned a series of potential losses into a series of tiny profits, finally getting a position that “sticks” to ride a trend. It may mean I have more tries at entering a trend than traders who can handle the pain of holding a losing trade for longer, but it does mean I sleep easier at night.

Experienced members are encouraged to add their own tips in comments below. Maybe you think there’s a really great tip I’ve not mentioned? Or maybe you think one of these tips could be said differently?

FTSE Elliott Wave Technical Analysis – 5th September, 2013

Last week I expected downwards movement from the FTSE. This is not what happened. Price moved higher and sideways, but remained comfortably below the invalidation points on the hourly and daily charts.

Click on the charts below to enlarge.

FTSE Daily Elliott Wave Chart Monthly 2013

At super cycle degree this structure may be an expanded flat: cycle wave a subdivides into a three wave zigzag (with a slightly truncated C wave), and cycle wave b subdivides into a corrective structure and has passed the minimum of 90% the length of wave a.

The most common type of flat is an expanded flat. This requires cycle wave b to reach up to 105% the length of cycle wave a at 7,103.67 or above. The last upwards wave is likely to reach this point.

When primary wave C is a completed five wave structure we may expect a trend change at cycle wave degree.

If cycle wave b reaches 105% the length of cycle wave a at 7,103.67 or above then we may expect cycle wave c to move substantially below cycle wave a at 3,460.71.

If cycle wave b ends before 7,103.67 then we may expect cycle wave c to end just slightly below 3,460.71 as the structure at super cycle wave degree would then be a regular flat correction.

FTSE Daily Elliott Wave Chart 2013

This daily chart focusses on intermediate wave (4) within primary wave C upwards.

Downwards movement labeled minor wave A is a completed five wave structure. It is very difficult to see this as a zigzag, so it is extremely unlikely that intermediate wave (4) is over here.

Upwards movement labeled minor wave B is a clear three wave structure. Minor wave B is now most likely over. Minor wave C downwards must unfold either as an impulse or an ending diagonal. Because the first wave downwards of minor wave C unfolds only as a zigzag on the hourly chart, it is most likely that minor wave C is unfolding as an ending expanding diagonal.

Within an ending diagonal all the subwaves must subdivide into zigzags, including the third wave. The fourth wave should overlap first wave price territory but may not move beyond the end of the second wave.

Within the diagonal minute waves i and ii are most likely complete. Minute wave iii is unfolding as a larger more exaggerated zigzag.

Within minute wave iii minuette wave (b) may not move beyond the start of minuette wave (a). This wave count is invalidated in the mid term with movement above 6,627.96.

We may expect minor wave C to most likely make a new low below the end of minor wave A at 6,023 to avoid a truncation. Intermediate wave (4) may not move into intermediate wave (1) price territory. This wave count is invalidated with movement below 5,989.07.

FTSE Daily Elliott Wave Chart 2013

Last week’s analysis expected more downwards movement, which is not what happened. Upwards and sideways movement was a continuation of minuette wave (b) within the zigzag of minute wave iii. Price remained below the invalidation point.

Minuette wave (b) is now a 65% correction of minuette wave (a), just above the 0.618 Fibonacci ratio.

Minuette wave (c) must unfold as a five wave motive structure, either an impulse or an ending diagonal. At this stage it is too early to know which of these two structural possibilities it will be.

Minuette wave (c) would reach equality with minuette wave (a) at 6,302. This target may be met in about a week.

Draw a parallel channel about this zigzag from the start of minuette wave (a), to the end of minuette wave (b) with a parallel copy upon the end of minuette wave (a). Expect minuette wave (c) to end about the lower edge of the channel.

Minuette wave (b) may not move beyond the start of minuette wave (a). This wave count is invalidated with movement above 6,627.96.

Entry Timing Technique Using Bollinger Bands® and Elliott Wave Oscillator

Set up the following indicators on a 15 minute chart:

– Bollinger bands; 1 sd and 2 sd.

– Elliott wave oscillator, or MACD (to use the histogram only).

The sequence of steps is:

1. Get the expected direction from your Elliott wave count. On the hourly chart draw a channel about the most recent movement which should be nearing an end.

2. Wait for a channel breach. Depending upon risk appetite, either on the hourly chart (less risky) or the 15 minute chart (more risky).

3. Wait for price to enter the two Bollinger bands on the OPPOSITE side to the expected trend direction. If you expect price to go up wait for price to enter the lower two bands. If you expect price to go down wait for it to enter the upper two bands.

4. Finally, wait for a bar on the histogram which is smaller than the one before it.

5. Enter your trade.

6. Take profit either using a target calculated from your Elliot wave count, or after a channel breach of the new movement.

Example for an upwards trend:


Example for a downwards trend: