I have bad ankles.
While playing basketball, I have dislocated my right ankle, torn ligaments in both my right and left ankle, and severely sprained each of them so many times that I've lost count.
All told, I've been in a cast four different times with busted up ankles.
But I continue to play basketball.
I love the game.
And, over the years, my ankles have kept reminding me that they are my weakest link.
Earlier in my round ball career, I used a quick first step to blow by unsuspecting defenders on the basketball court.
However, with two bad "wheels," I can no longer count on a quick move as a primary offensive weapon.
Now I use long-range shooting, an assortment of ball fakes, and more than a touch of guile to put points on the board.
The key is I continue to play.
I've simply learned how to properly protect myself.
To enable my continued participation, which some might see as courageous, I use ankle braces.
Quick Aside: For the record, neither my personal doctor nor my orthopedic surgeon considers my continued play as particularly "courageous."
They have preferred to use terms such as "medically unsound," "ludicrous," and "testosterone-driven ego" to describe my continued involvement.
I have discovered - through experience - that throwing on just any ol' drugstore brace is a recipe for disaster.
Not only do the cheap versions fail to provide the protection that I need, they are usually so restrictive that my on-court performance goes down as well.
But the right braces - ones that provide protection and allow me to move freely - help me get safely back on the court time and time again.
I've found that the same is true for many traders and investors.
Some use no protection at all - leaving their positions open to devastating moves against them.
Others use certain tools for protection but don't set them correctly - limiting the possibility for optimum protection and profits.
But not us.
Here at The 10-Minute Millionaire, we have a system in place that has protection and proper risk management at its very core.
As I'll show you in a minute, our strategy utilizes two key components in its risk management plan to keep us in the game and scoring points no matter what kind of market we are facing.
And right now, we need it more than ever...
Forewarned Is Forearmed
The markets are about to undergo a major change. The grinding, low volatility market that has been with us for years is going to give way to a market that will feature much more explosive moves - in both directions.
I believe this will bring us a "trader's paradise" - one that will provide opportunities to make money on both the jumps up - and on the drops.
In addition to being an incredible profit opportunity, this new, more volatile market will also expose our money to risks we haven't seen in years. We have not experienced a market pullback of even 5% in well over a year.
But unlike most investors, we will come into to this new, high-volatility market fully prepared.
Over the past few weeks, I've warned you about the coming sea change in the market, and I've show you that our system will be your secret weapon against the coming chaos.
The automated, emotionless nature of our three-step system is designed to sleuth out extremes in any type of market we might face.
But it's not just about finding trades.
Protecting your hard-earned capital along the way is just as crucial to navigating the downfall of the "easy money" market as finding which trades to target.
And that is exactly what our system is designed to do for us.
I refer to it as "framing the trade."
The 10-Minute Millionaire system uses two key components to manage risk:
- Contingency exits (more commonly known as "stop losses") for each trade
- Position sizing, a device that helps control risk through the careful management of the number of shares or contracts that you trade
Over the past 30 years, I've learned that these two elements of risk management are the biggest reasons that accounts get blown up.
And since both of these topics are so crucial to our overall goals, we're going to take the time to dig deeper into both of them.
Starting today with a closer look at how we use contingency exits...
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If You Don't Have a Plan to Get Out, You Have a Plan to Fail
As 10-Minute Millionaires, we know that each trade is just one piece of a much larger puzzle. Probability is in our favor if we follow the system, but we know that this a probability of a win, not the certainty of one.
That's why every trade needs a predetermined way out... an exit plan for when the trade doesn't go as expected.
That's what makes stop-loss orders an extremely simple and powerful way to excise emotion and downsize risk.
There are several methods that you can employ for placing stop losses.
Here is an overview:
- Set stops based on a fixed dollar amount (I'll get out when the stock drops $1.50)
- Set stops based on support or resistance levels
- Set stops based on the volatility of a stock or commodity (one way to do this is by setting the stop using a multiple of the daily range)
- Set stops based on a change in trend or some other indicator defined by your system
Let me say now that in almost all situations, any stop is better than no stop at all.
With that said, let's get to the bottom line: Some methods for setting stops are much less effective than others.
Trader and author Perry Kaufman has shown that through extensive research that using a fixed dollar amount for stops reduces the performance of most investing strategies. So if you typically just put your stop $1 or $2.50 away from the entry for every trade, you are almost certainly hurting your performance.
This is because arbitrary stop levels can take you out of trades before your trade has really proven it's not working.
There are several stop placement methods that can give better system performance.
The simplest and most effective of these that I've found is the one we use in our 10-Minute Millionaire system - a trailing stop that gives our position plenty of room run and begins to limit our loss the minute the trade moves in our direction.
Trailing stops are so effective that multiple studies have shown that you can build a successful system with a random entry and properly placed trailing stop!
Well-placed stops can both protect your capital and improve your reward-to-risk ratio.
Make sure you're using the best stop-loss tools available.
That's even more important in volatile environments like one that we are headed full force toward.
Having a risk-protecting stop that not only protects our capital when a trade moves against us but also lets the winning trades run is a key way to navigate changing market conditions.
And that's exactly the kind of strategy we'll need for the coming sea change.
However, as I mentioned at the onset of this column, stop losses are only one piece of our risk management puzzle.
As I'll break down in our next column, even with our stop losses in place, incorrect position sizing can still wreak havoc on our portfolios.
So make sure you stay tuned.
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The post How Our System Will Keep Us "In the Game" When the Coming Market Storm Hits appeared first on 10 Minute Millionaire.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.