Hi traders/readers

I want to talk about how I manage risk in my trades — how I size positions, add to winners, and decide when to scale out.

 

i) I manage risk by prioritizing structural invalidation over opinion. 

This refers to my stop out point. When I am getting into a trade, I have identified a 'reference point' on the chart where I will exit as my thesis is no longer supported by the chart. For example: I want to enter a trade, I look for  a recent 'support' area or a point where price has formed a bullish pattern (e.g. bull flag) and use the lows of that area as my invalidation point - that's my stop loss.

ii) Trades are sized so that unexpected volatility does not impair decision-making

In fast moving markets, especially small-cap or penny stocks, the percent moves are often wild and mind bogglingly large! It can be very easy to miscalculate size and suddenly find yourself in a sticky spot, looking at a red figure you hadn't anticipated. One way I protect against this, (aside from pre-ordaining my stop out point before I get in) is by 'looking left' i.e. paying close attention to the the recent price action. Do I see the occasional large candle or large wicks or candlesticks where price has jerked dramatically?

... I will measure the size of those largest candles (percent-wise) and then size my positions to allow for/expect these candlesticks. In large candle 'wicky' charts, that means sizing down on my position.

Buying at support areas where price has stabilized for a lengthy period is safest, whereas if you are a high frequency momentum trader, (chasing high to sell higher), you have to be ever ready for the sudden dramatic price changes.

 

iii) Adds & Exits are pre-defined using observable market structure rather than discretionary judgement

So, point i) is about stop loss, ii) is about position sizing.

This point is about scaling decisions. How I add to winning positions - 'scaling in' - and how I scale out of winners - 'scaling out'.

I don't scale in because price moves in my favor - I scale when risk improves. That usually means price acceptance over a reference level (maybe a new higher low), liquidity stabilizes (tightening price action while price still gradually uptrends), or failed counter-moves are absorbed (big buyers show up on the tape, to absorb selling pressure). The core idea here is to scale on risk improvement - not profit.

With scaling out, I reduce exposure when assymetry decays.. typically into extension, increasing volatility or when price becomes detached from reference levels. Partial exits are a risk-management tool, not a forecast. Let me break down what I just said, simply:

Asymmetry is when there’s a temporary imbalance in risk and reward — usually because positioning and liquidity haven’t fully adjusted after an initial catalyst.  So, lets say I have taken my entry near a reference point, I'm betting on further upside. When that happens and the re-pricing is largely complete, we get a slowing up of the momentum - that's where I'm scaling out. 

To summarize, the core objective is to survive uncertainty first, and extract opportunity second. Protect the downside. Get a good entry. Take profits in accordance with behaviour and structure, not prediction.