Best tips for risk management


Market Neutral Strategy: Staking The Odds in Your Favor

Copyright  (c)  2007  CashFlow  Avenue
Risk Control: How much can you afford to lose
Is there a trend in stock and optionin a trade if it goes wrong?�That must
trading?�be determined before any position is
opened.�Setting your rules upfront will
Let's start of by defining a trend.�Acurb emotional and irrational decision
trend is simply the general direction of themaking.�For most traders, emotional
market.�The market can only move in 3decisions can almost certainly be the worst
directions � up, down ordecision that they make.�Knowing what to
sideways.�It  is  as  simple  as  that.do before trouble come knocking will help
keep  you  on  your  toes.
For directional traders, knowing the trend is
important because that is how money isAny trader should already know the below
made.�If there is no trend, then howquestions  before  entering  into  a  trade.
would the buyer of the uptrend profit when
the market moves sideways.�They need toHow  and  when  to  enter  the  market?
buy low and sell high.�Likewise, short
sellers can only benefit when they sell highHow many contracts or shares to trade at any
and buy back lower.�Trend followers willtime?
always wait for the market to shift or turn
before jumping in.�Directional trading,How  much  money  to  risk  on  each  trade?
like any trading strategy, requires
discipline and patience.�DirectionalHow to exit the trade if it becomes
traders can only benefit when the marketunprofitable?
moves  in  their direction � up or down.
How to exit the trade if it becomes
Directional trading demands strongprofitable?
self-discipline to follow precise entry and
exit rules. Successful traders utilize strongWhile trading trends can be extremely
risk management systems that use currentprofitable, the odds are unfortunately staked
market price, portfolio allocation system inunfavorably against the directional traders,
an account and takes advantage of marketeven more so for directional option traders
volatility. Directional traders use andue to time decay.�A relatively unknown
initial risk strategy that determines theirbut superior trading strategy does not
capital exposure at the time of entry. Thisforecast nor predict market movements exist
means that they must know how much to buy or� a Market Neutral Trading
sell based on their account size. On theStrategy.�Prediction is impossible in
other hand, adverse price movements may leadthe stock market.�The Market Neutral
to an early exit for their entire trade for aStrategy is certainly not a holy
small loss. To be a successful directionalgrail.�It is not some passing fad or
trader, the risk reward ratio should be 1:3hyped-up secret trading strategy.�It is
for any trade to be worthwhile.�That isthe strategy that takes full advantage of the
because despite the technical toolsdepreciation of options premium as it
available, directional traders are wrong mostapproaches expiration.�Markets may move
of the time.�If they are profitable 4 ofup, down, or even sideways for this strategy
10 trades, then they can be considered asto be profitable. If you must trade everyday,
excellent traders.�Directional tradersthe market neutral trading strategy will not
have the market odds staked against themwork for you.�A sound trading strategy
every time that they enter into ashould only limit you to 3 to 6 trades per
trade.�So when they are right, they havemonth which should provide decent returns of
to let their profit run, and when they areup to 10% per month.�With all the
wrong, they must quickly cut their lossesdiscipline and rules of a directional trading
fast.strategy applied, the market neutral strategy
can  be  used  to  devastating  effect.
Before entering into any trade, any trader
must  already  consider  the  below.What  do  you  need  to  get  started?
Price: One of the first rules of directionalAn active mind, willingness to learn, strong
trading is that price is the main concern. Ifdiscipline  and  passion  to  succeed.
a market is at 50 and goes to 47, 49, and 46
- the market is in a down trend. SometimesNo knowledge of what is happening in Shanghai
technical indicators can show otherwise.or the ability to read financial statements
There are many different indicators that canis required. The key is the price on the
supposedly show where the market shouldchart.
move.�While that is always a nice tool,
successful traders should only be concernedDiscipline and common sense to do the right
with what the market is doing, not what thething.
market might do. The price tells you what the
market  is  doing  ï¿½ not the indicators!About ten minutes a day to check on all open
positions.
Money Management: The most critical factor of
any trading system.�Successful tradersA reliable PC/Notebook and internet
will already have a money management systemconnection.
is place.�Money management ensures that
the traders will always be in businessTrading is a zero-sum game. For every winner,
despite a bad spell.�Good traders willthere is a loser.�If you are tired of
lose money.�Bad traders lose morelosing in the market, then it is time to arm
often.�Whatever you trading level, ayourself with Market Neutral Trading
good money management system will prevent aKnowledge.
wipeout  of  your  portfolio.



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