I’d like to talk about a critical aspect of day trading – risk management. It’s an unsung hero, a cornerstone of our trading experiences that provides a safety net when our trading journey encounters turbulence.
On July 27th, 2023, I decided to place a trade on Tesla Inc. ($TSLA). At 1:28 PM, I shared the trade idea to purchase $TSLA calls with an expiration date of July 28, 2023, and a strike price of 265C, with the option price tagged at $1.98.
However, the volatility of trading soon took its course.
At 2:10 PM, I was stopped out of $TSLA calls for $1.54 which resulted in a loss of $0.44 per contract. A tough pill to swallow, indeed, but a stark reminder of the realities of day trading.
As day traders, we understand the importance of risk management. It acts as our compass, guiding us when the market’s tides are rough and uncertain. However, every trader’s risk tolerance is different, mine was based primarily on technical analysis.
I was optimistic about my entry position. The stock appeared to have reliable support from the previous day’s trading activity. I shared this perspective with our trading community, outlining the following parameters:
I had a clearly defined support level and target for $TSLA. The support levels were $262.72, $261.75 and my targets were $263.48, $264.25, VWAP.
With these in mind, I believed the risk was justified. My stop loss was clearly defined using technical analysis; if $TSLA closed below the lows of the previous day, I would exit my position. Unfortunately, the stock took off in the opposite direction of my calls and closed below my risk level, leading me to sell at a loss.
However, it’s essential to remember that the main takeaway from this experience isn’t the loss, but the utility of managing risk. Such days are par for the course in day trading. What’s paramount is the ability to leverage risk management to limit potential damage.
Risk management is a vital part of trading as it defines your risk-to-reward ratio and helps prevent catastrophic losses that could obliterate your trading account. While risk tolerance varies from person to person, understanding your own limits is crucial. Even though my trade didn’t pan out as expected, I believe the decision was justified given the risk I was willing to take.
The purpose of sharing this experience isn’t to dwell on losses but to underscore the importance of risk management in our trading journey. It’s an invaluable tool that helps traders not only survive but also thrive in the dynamic world of day trading.
Remember, in the realm of trading, a well-planned loss is a victory over an unplanned catastrophe.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. Trading involves risks, and past performance is not indicative of future results. Always consult with a qualified financial advisor before making any investment decisions.