1R
How to manage risk on a long play ?
You can think of R as, how much you intend to gain from this trade in conjunction with how much you are willing to risk on this very trade
Say, you buy a share at $ 100
You are willing to risk $ 1 on this trade, and you set your sell stop (stop loss) at $ 99
Based on the news, your edge, long/short bias and conviction, you decide you want to go long on this stock
At the open, you buy 100 shares of this stock at a price of 100, and it immediately spikes to 101 (proving your thesis correct)
So now, you have a trading decision to make
Option 1 : You can sell all 100 shares at 101
If you do that, you get to lock in a profit, but you might have seller’s remorse, as you watch the stock tick up to 105, then 110 and then to 112
I hate this feeling - its visceral, its gut-wrenching, and it makes me want to run next door and tackle the concierge at the front desk
Momma always said, violence or punching someone is never an option
When I was in middle school, we had crafts training classes and we were given baby knives and scissors to make pretty shapes, like triangles and rectangles out of cardboards
Kids lost their shit if someone made a pentagon or a hexagon, or I don’t know, a fuckin’ parallelogram
We was really small and sat close to one another, and I did not pay attention … so I just cut the cardboard turned sideways talking to my friend
This girl was sat in front of me, her hair was draped over her chair and it fell on my desk. As I cut the cardboard to make a rectangle while talkin’ to my friend, I chopped a whole loop of this girl’s hair right off
It did not go well
They called my mom, made me apologize and skip school for a few days
That was not a fun week - at all
This girl hated me for the rest of the third grade. When I make a mistake, I mostly try and pin it on other people, but try as I might, there was no else to pin this shit on
I thought about saying she had annoyingly long hair and needs a power bob, or the more obtuse, just relax, it’ll grow back,
but even I knew that saying that might actually get me kicked out of school
Her mom came and complained to the big boss at school, and it became a whole thing
What a colossal waste of fuckin’ time, spend fifty-five motherfuckin’ minutes each week cutting rectangles out of fuckin’ cardboards,
for what ?
for me to become the next Picasso or Jackson Pollock ?
Honestly dude, do I look like a Jackson Pollock to you ?
From that point on, they made me sit right up front, for there ain’t no one in front of me, and now, the teacher can keep an eye on me
This meant I had to have finished all the fuckin’ homework the night before and I can’t solve the last two homework problems in class - because I was the first one they checked to see if I did all my homework
What a nightmare, all because of that crafts class, because you know, crafts classes are known to be career making
I hated third grade
Come to think of it, it was pure torture … just a bunch bratty kids with brattier and insufferable parents who think the apple of their very fuckin’ eye, their kid, is the second coming of Marie Curie, Indira Gandhi or Serena Williams herself
Let me say now, what I didn’t back then,
It was not my fault and none of this would have happened if she had a power bob
This is gettin’ a little Bill Burr on the quick, let me rein it in and get this shit back on track
Option 2 : You don’t sell, you wait
Now, if it suddenly reverses from 101 and hits 100, then to 99 in a frenzy, because you waited with nothing but hope, you turned your winning position into a losing one
Congrats !
I hate this very feeling too - it’s almost like, why did I bother waking up, hydrate, meditate, be not hungover, and do all the pre-market work for ?
You think I scour the news everyday to be the smartest kid on the block ?
Oh for the love of Christ
- where the fuck is my profit dude ?
What then ?
There has to be a more elegant solution, right ?
Yes, there is
This is what professional traders use - it is deceptively simple, and yet, it helps your PNL and soothes your psychology while trading
You buy 100 shares at 100 with an initial sell stop at 99
As soon as it spikes to 101 right off the open, sell half, and move your sell stop to 100 (for all the other 50 shares)
When you sell half, you get 101 x 50 = 5,050
If it reverses and goes back to 100, your sell stop would kick in and sell the remaining 50 at 100 (PQ = 100 x 50 = 5,000)
PNL = 5050 + 5000 - 10000 = + 50
Positive PNL is music to my ears
Au Contraire,
If it does not reverse back, and keeps going up - you get to avoid crippling seller’s remorse, because you held on to the half of it
Say, if it ends up at 110 two minutes before close, then you sell the remaining 50 at 110, and get 110 x 50 = 5,500
PNL = 5050 + 5500 - 10000 = +550
Once it got past your buy price at the open, if you manage your trade right, your PNL ranges between + 50 and + 550 for this case
Clean, elegant, professional, and nothing left to chance
So, you risked one dollar (sell stop at 99) to make one dollar (sell half at 101), this is what we call 1R, it is trader short-hand for a trading strategy where you profit the same as you risked, at the first batch of sell on the upside
You also trade better because you know you won’t dip into red after selling half at 1R on the upside, and moved your sell stop to break even for the other half
This works on the short side too, and it is psychological Nirvana !
We call this 1R on the street
Here is is your moment of zen
— Deepak Sivaraman PhD (Axe), adeadcatbounce@gmail.com
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