| Would you like to discover a quick and simple risk | | | | These are mandatory STOP trading criteria. Alongside |
| management strategy that is easy to apply to any | | | | each of these risks you need to define the actions |
| trading plan, and has the potential to vastly improve | | | | you will take. For example, how will you manage your |
| results? Excellent! | | | | charting platform going down? If you're a long term |
| I'm not talking about the placement of stop losses, | | | | trader this might not cause too much stress and may |
| which is what most people consider as 'risk | | | | actually be an AMBER rather than RED - your stops |
| management'. Rather, this is a simple tool for | | | | may be in the market and you probably have |
| managing the risk in your trading business. | | | | alternative charting options. However if you're a |
| Effective trading requires focus and discipline. There | | | | day-trader operating on small timeframes, this is |
| are many external factors that can interrupt your | | | | clearly a RED criteria. You may choose to manage |
| focus, and destroy your discipline, such as: | | | | this by contacting your broker by phone and closing |
| - An unreliable internet connection | | | | out all positions. |
| - Your charting platform losing its signal | | | | So, for each risk we define as a RED, we simply |
| - A knock at the door | | | | document a procedure to manage that situation. And |
| - The telephone ringing | | | | when one of these conditions emerges while trading, |
| - A baby crying o Hunger | | | | we carry out our procedure, and then stop trading |
| - Noticeably too hot or cold | | | | until the condition has gone. |
| - Fatigue (hopefully from late night trading study, | | | | Now, everything else that is not as serious as a RED, |
| rather than alcohol and party induced fatigue) | | | | but can still influence our trading, is an AMBER. The |
| And as if that's not enough, there are many internal | | | | problem here is, as mentioned before, when does it |
| factors that can also interrupt your focus, and | | | | justify stopping, or when should we just continue |
| destroy your discipline, leading you to make decisions | | | | with our trading? |
| and actions based on emotion, rather than following | | | | The Rule of Three risk management strategy simply |
| your documented trading plan. You've no doubt | | | | states that if you get three or more AMBER |
| experienced some of these already. The internal | | | | conditions then that is also an automatic stop. At that |
| factors would include things such as: | | | | point you can either quit for the day and head for |
| - Hesitation in entering once price triggers an entry | | | | the golf course, or manage your AMBERs back to |
| - Hesitation in exiting when price hits your stop loss | | | | GREEN and resume trading. |
| - Doubt about your entry after entering the trade | | | | So, if your baby is teething, and just won't stop |
| - Fear of exiting at your stop loss | | | | crying despite your partners attempts to comfort |
| - Worry about how you will explain another loss to | | | | her, and you just suffered your second loss in a row, |
| your partner | | | | and you now find yourself hesitating at an entry |
| - Any thought about an early exit of this trade, just | | | | trigger - that's three AMBERs. |
| to make up for earlier losses | | | | STOP TRADING! |
| There's a whole lot more, but hopefully you get the | | | | Before you continue, make sure you manage your |
| point. | | | | risk back into GREEN, or at least less than three |
| One flaw in many trading plans is the absence of a | | | | AMBERs. Perhaps take a short break to review your |
| valid strategy for managing these risks. So, let's fix | | | | two losses and confirm that the setups were valid, |
| that situation. | | | | review your trading statistics to confirm that two |
| The problem is, traders have no guidelines as to: | | | | losses in a row is a normal occurrence, and conduct a |
| - When the risk justifies us stopping our trading, | | | | short relaxation and visualization session. If you're |
| - When to just pause trading and manage the issue, | | | | braver than I am you might also ask your partner to |
| or | | | | take the baby out for a drive (ask nicely though!) |
| - When to ignore it and continue trading. | | | | If you're satisfied that you've now managed the |
| The way I do this is using a very simple risk | | | | situation back to less than three AMBERs, or ideally |
| management strategy developed by Shell, a global | | | | completely back to GREEN, then you're right to start |
| group of energy and petrochemical companies. | | | | trading again. Otherwise, take the day off. |
| Obviously they didn't create it for use in trading - I | | | | Sometimes a 'three AMBER' complete break from |
| just find that it works really well in this environment. | | | | trading is a wise move. |
| (Yes, I know what you're thinking - I am a risk | | | | While we all hope that our trading will occur within a |
| management nerd!) | | | | completely GREEN environment, life's just not like |
| What we need to do is firstly classify your current | | | | that. The Rule of Three risk management strategy |
| trading as being in a GREEN, AMBER or RED condition. | | | | gives you a simple guideline for when enough is |
| Think of a set of traffic lights. GREEN indicates that | | | | enough - and you need to either stop completely, or |
| everything is fine. This is the desired trading | | | | reduce some of the external or internal risks. Try it, |
| environment. RED is a compulsory STOP condition. | | | | and see if it helps in your trading as much as it does |
| And AMBER is a warning that you need to be | | | | in mine. |
| prepared to stop. | | | | It's simple: |
| What I'd like you to consider is documenting any RED | | | | - GREEN is GO, |
| conditions within your trading plan. This might include | | | | - AMBER is CAUTION |
| things like: | | | | - and RED is STOP, but |
| - An unreliable internet connection | | | | - 3 AMBERs are equivalent to a RED. Stop trading, or |
| - Your charting platform losing it's signal (when you | | | | manage those AMBERs back to GREEN. |
| have no alternative) | | | | Happy (hopefully GREEN) trading, |
| - Fatigue due to less than six hours sleep the night | | | | Lance Beggs |
| before, or more than four consecutive nights with | | | | © Copyright 2008. Lance Beggs. All Rights |
| less than eight hours sleep (customise this for your | | | | Reserved. |
| own requirements) | | | | |