Raise your hand if this has ever happened to one of your trades…
You buy a stock thinking it will break out higher, but instead, it reverses down, and you get stopped out.
It then spikes back up, but this time, you’re no longer in the trade.
It can happen to the best of us. And while it’s frustrating, there is a fix to this.
And that’s what I’m going to tell you about today.
Did you hear that a major crypto event has moved up? Don’t miss what it can mean for you here!
Table of Contents
A Stock’s Volatility
When you plan your risk level, you have to consider the stock’s daily range and volatility.
Low float, high volume stocks will have more range than a high float stock trading average volume.
That means your risk level might be farther away from your entry than you like.
Look at InMed Pharmaceuticals Inc. (NASDAQ: INM) yesterday…
The stock had a $5 range from the morning low to the high.
It has fewer than 1 million shares in the float and traded over 30 million shares.
Compare that to a stock like Sirius XM Holdings Inc. (NASDAQ: SIRI) which trades at around $6. But it has a float of 660 million shares and traded below average volume…
It had a range of only 10 cents from the morning high to the low. So you might have a tight risk, but the stock isn’t as volatile as we like to make quick in and out trades and capitalize on significant gains…
So now that you’re prepared for wild price swings, let’s look at key levels you can use as a risk in an INM trade…
There are plenty of chart levels traders can use as risk. When going long you can use:
- Premarket lows.
- Previous resistance breaks where resistance becomes support.
- The low of the day.
- VWAP fails.
- Green to red level.
What level you use can depend on the chart pattern you’re trading or whatever level is closer to make you comfortable in your trade.
Yesterday in my Daily Market Profit alert, I gave subscribers a plan to buy INM if it breaks $14.
My risk was set at $13.35, which was VWAP at the time. And my goal for the trade was the $15.28 Oracle resistance level.
That plan played out in premarket. But if you missed it, you could’ve entered INM when it broke the morning high above $16.25.
In this case, again you could’ve risked a VWAP fail at around $15. So you have roughly $1 per share of risk. And to keep a risk/reward level around 3:1, your goal would be $19.
Here’s what it would look like…
When you trade these volatile stocks and have a wide risk, you must be careful with your position size.
In my INM example, you have $1 per share of risk. So if you trade 100 shares, that’s $100 on the line for that trade.
Probably not ideal if you only have a $500 account. But if you have a $5,000 account that’s completely acceptable.
If you have a smaller account, maybe you only take 50 shares — or even 20.
Then you’re risking $50 to potentially make $150. Or $20 to potentially make $60. Still nice gains for a $500 account. And an acceptable amount to risk.
The problem most traders have is they just get into a trade with no planned risk level. Then they cut a loss quickly, only to have their thesis work out in the end.
The solution to that is to recognize and set your risk level. Then do simple math to calculate your position size based on your max risk per trade.
And if it’s not your ideal setup, or you’re on a losing streak, cut your position size down even more to build confidence.
Once you find your sweet spot based on data in your trade journal, you can start stringing wins together. And rinse and repeat it to build consistency.
Eventually, you’ll be comfortable enough to slowly size up your positions.
Have a great day everyone. See you all back here tomorrow.
Lead Trainer, StocksToTrade