Risk and Trade Management Primer

At Vtrender, we believe a lot in risk management and the preservation of our capital. Without our trading capital, we can do nothing in our line of work however well informed or knowledgeable we may be. And if you can show up with a full trading account for the Market Open every session of the year for many years you have walked yourselves into being successful traders. It’s as simple as that.


We touched a bit on this topic in another post – http://vtrender.com/risk-management-on-calls/ where we have emphasised on trade sizing. To sum it up you would risk only 3% of your trading capital for a positional call and only 1% in an intra-day setup.


One of my biggest beliefs is that the risk to a trade is in the wrong setups and the wrong trade sizing. If you go back and look at where you have lost money, it would be one of the above 2 or in some cases both. There is a saying which goes- if you have dropped coins you should look for it at the spot you have dropped it. If you move away from the spot, you will not recover the money again. But if you are not doing changes, you will lose it again.


At Vtrender, we focus a lot more on the proper levels to trade out of, so that the setup is right rather than a 20 point Sl thrown around a random entry point. At a fixed 1% risk to a trade, it does not matter if the SL is 20 points or 40 points because you have brought down the risk by choosing a right size to trade. When you do that, all you have to do is tinker the position size and adjust the trade so that the setup is protected.


Some rules once you are in the trade…

For Intra-day (and for some stops on swing calls ): 

1) The highest volumes seen in Intra-day Trading are in the first hour and the last hour. We say in Market Profile that the OTF or Higher Time Frame ( positional multi-week/ month traders) are active in this period. They try to move the market to value or away from value. We do a bulk of our intra-day trading in the first hour of the day. The higher volumes allow you to enter stops and targets in the trading platform and they are easily executable.

2) The next 3 hours till Europe opens from 10.30 to 1.30 are with the locals. If OTF is present at the Open they have moved the market and generally step back after IB is done. Locals and scalpers are traders who will take quick profits if the positions move in their favor. During this period, we discourage our traders from entering stops in the system for Open trades. The market volume is thin and the orders can be seen easily allowing locals and seasoned traders to make a run for them. You can enter profit stops however and make exits. Also, note the day light saving mode when Europe opens around 12.30 and volumes may rise a bit earlier when Europe opens earlier by an hour.

3) The last 2 hours are again a period of good volume when the market is taking cues out of Europe and thinking of the US session later in the evening to adjust exposure. Again in this period, you can enter stops in system or entries as movement is directional again.


For Positional trades:


1) Sometimes the market opens with a gap and a stop on an existing position has been violated. Instead of rushing to close, it is best to observe the 15-minute rule. Most gap opens result in an OAOR and the market is usually flat post that open. The 15-minute rule asks us to wait for 15 mins post a gap for a positional trade even if it is beyond the stop point. We either exit at the end of the first 15 mins or use the low/ high of that 15 minute as a SL to tweak the position.

There may be one or two times the market has not priced the exogenous event well and moves further away. This is generally an extreme case like a major calamity or situations like a 9/11 or a terrorist strike etc. In such cases, preservation of capital becomes the most important factor and the rule book can be dismissed. However if the market has put you into a wrong spot once, you will get a chance to come back in another situation which may turn your way completely. The market is fair provided the rules you apply to yourself whilst trading it are rigid.


2) For re- entries and additions in existing positions, we often choose the closing hour and the last 15 minutes of trade. This is because the closing price of the auction is important in a swing setup for continuation or change.


In Closing, value your account and treat it well. Take those part exits, move stops to cost. The only reason we do it and suggest it is to make the trade risk free and in the case of options even investment free. Setups will always be around. Capital is the most important part.