3 Foolproof Strategies To Minimize Risk

After coming off an incredible May that saw me post more than $80k in profits—the second best month of trading in my career—I’m attempting to exercise some discretion in the early days of June.

While I still attempted to build a cushion on Monday with a couple of bigger positions in Avenue Therapeutics Inc. ATXI and Genocea Biosciences Inc. GNCA, I’ve gotten the sense that momentum is fading and I don’t want to fall back into a pattern of chasing momentum until I get walloped with a big red trade.

My prediction has so far held out. I’ve seen fewer stocks follow through on their premarket moves and less volatility in the regular session. Although I’ve probably reduced my profits on a handful of winning trades this week with my less aggressive strategy, I’ve also likely avoided several thousand dollars in losses by easing off the accelerator and focusing on finishing each day in the green.

I obviously hope momentum gains some traction as we go deeper into June. In the meanwhile. I thought it might be helpful to provide three tips for how I manage my risk during market slow periods.

Setting Loss Limits

Warrior Trading students or those who follow my updates know that I have a daily max loss limit on all of my accounts, currently set at $4,000. While that hard stop on trading too deep into the red acts as a great means of mitigating additional losses, I also have self-imposed limits on everything from how many consecutive losing trades I allow myself to take (three) to how much profit I’m willing to lose before signing off (half).

These limits are self-enforced, and I fudge them occasionally if I’m feeling confident (which has mixed results). The point is these rules not only keep me from seeking the momentum that simply isn’t there, but also cue me in on when I’m repeating bad behavior that will lose me money. Remember, I created those rules for a reason.

Restricting Share Size

A tack I undertook this week was to decrease the maximum position size I can take at a given time from 15,000 to 6,000 shares. This is another hard-and-fast restriction on my trading behavior that limits the number of shares I can hold at any one time.

The risk/reward of capping your account’s maximum share size is similar to using stop orders, it can significantly limit your downside risk, but you’ll also lose out on potential profits. If you have strong discipline and are still confident that you can find A+ setups, you may want to consider setting unofficial share limits. However, putting hard caps on your share size can be a useful tool for more advanced traders with a muscle memory trained on hitting their “buy” hotkeys.

Knowing When To Walk Away

Finally, your best risk management tools are your own two legs. Every trader runs into days where they struggle to make or even find a single good trading setup. In desperation, many traders will leap the first halfway decent chart they can find, which more times than not ends in a losing trade.

Doing nothing often feels like a loss, until you eventually take an actual loss. Rather than wasting time waiting for a good setup, placing bids on mediocre chars or trading past your preferred time frame, some days you just need to walk away with a clean slate.
All of these strategies rely on trading experience and the context to recognize patterns, resources that new traders often lack. My hope is that novice traders watch my recaps and learn along with me and the warrior trading students the patterns and signals occurring within the market and at their own trading stations on a daily basis.

Warrior Trading is a content partner of Benzinga.