How to Use Market Context to Manage Risk

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9/4/17 – Almost every article one can read about becoming a successful trader discusses risk management. In addition, almost every article that discusses becoming a successful trader talks about letting the winning trades run. So, how do you know when to let a winning trade run and when to let it run to a certain point and get out? On Friday, NVDA and the general market gave us clues that if we were in NVDA right out of the gate, we should get out when we were up.

Below is the daily chart for NVDA. You can see it was gapping up above the $170 level, which was above the previous day’s high. In addition, the jobs report that morning was a good report and all of the indices were gapping up. So, we were looking to go long if we received a buy signal.

The charts below show the QQQ on the left and NVDA on the right. The premarket high for NVDA was about $170.74, which is indicated by the white line. Therefore, an aggressive entry was a break above the pre-market high.

Now, if you look at the boxes on both charts above, which shows the 9:35 bar, you can see NVDA was going up, but QQQ was falling below pre-market lows and below the previous day’s close. At that time, all of the indices were fading as well. Moving to the 1 min chart below, you can see the break of the pre-market high occurred around 9:38, so we had a buy signal. However, when the general market faded, I watched the 1 minute chart for any inidication to exit the position and saw the price action circled below and decided to get out. As prices consolidated and failed to break out higher, and given that the general market wasn’t running, this was my signal to get out when prices broke the low of the pin bar in that consolidating area. Generally, I like to hold positions with the direction of the general market. If the general market (QQQ, DIA, IWM, and SPY) are not moving together in the same direction or if they are moving in the opposite direction of my position, then I will exit my position.

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