One of the most important things we need to do as traders is to learn to manage our risks. Managing risk will allow us to continue to trade even when the markets turn against us. There are 2 types of risks that are important to make sure we are not becoming over leveraged. The first is our individual trade risk. This is the risk that we are allowing ourselves to take on any one individual trade. A common practice would be to limit the risk on a single trade to no more than 1-2% of our total account value. If we had a $10,000 account, we would be willing to lose $100-200 in each trade. The second risk parameter that we should consider is our overall account risk. This risk limits the total amount we would lose in our account if all our trades hit our stop losses. If we choose to limit our total account risk to 10%, that would mean we would lose $1,000 of our account if all our trades hit their stop losses. By having our risk limits set on each individual trade as well as our total account we will be able to know how much to purchase each time we take a trade. It will also minimize the possibility of taking a devastating loss in our account.
This was a very bullish week, overall, as the 3 major indexes all moved into new all-time highs. While the market continues to be bullish, we need to make sure we are prepared for the possibility that a retracement in not too far away. This should be expected because we know that the market will go through cycles of bullish moves followed by bearish moves. These moves are a constant in the markets and are what make up the bullish and bearish trends we see. Where we need to be careful is just jumping into the markets because we hear the prices are running up. We still need to wait for our deliberate setups to happen before we take the trades.
While earnings are beginning to slow down a bit, they may still have some impact over the next few weeks. Thus far, we have seen a strong earnings season which has contributed to current move higher. We will also want to keep an eye out on what news is being released as the markets are continuing to move based off what their results are. US-China trade, impeachment inquiries and general economic issues continue to headline the market news. Making sure we are using good risk management can help us avoid those times a surprise news announcement comes out and really moves the market.
This week we are going to look at the weekly charts of all 3 major indexes to see how they compare.
DJ-30
This week we saw the DJ-30 chart move up to break above prior weekly swing highs. This will continue to be an important area to see if the bears try to push prices lower and test this breakout point. If prices hold at this support area, we may see a continuation of the bullish direction. If not, a nice retracement may be in store.
NASDAQ
On the chart of the NASDAQ, we saw prices hold above the prior all-time high to move into areas that have never been seen. After a new all-time high is made, it would not be unusual to see prices settle back down and retest this break out point. After 6 weeks of strong movements, it would not be unusual to see a bit of a pull back before heading higher once again.
S&P 500
With the S&P 500, we saw prices take out the all-time high last week and this week extend the bullish movement. The key will be to see if prices can pull back and remain above this breakout point from the old high. Again, like the other indexes, a pullback would not be unusual to see after these strong weekly moves.
As we continue to approach the holiday season, make sure you recognize that the markets may be a bit move volatile as traders and investors take some time off to enjoy family and friends. Again, using good risk management can help us manage the times when the markets may be more volatile while still allowing us to trade.