My next risk-assessment category is trade risk, which is identified on a variety of planes, each of which represents a possible scenario where the market moves against my position.
I want to measure my trade risk in terms of my downside possibilities. I want to envision my exposure in a situation where all my protective stops are elected on the same day (meaning every position is moving against me by the maximum amount).
And, I want to get a read on what my worst-case scenario exposure is. I want to look at several angles that pertain to a situation where the market is gapping against me on the opening, exhibiting wild price gyrations, wide bid-ask spreads, and buying-selling vacuums. In these extreme circumstances, my investment capital exposure can be significantly skewed to the upside.
I begin by determining my individual position risk. I start with my pretrade risk assessment, which is derived from a determination of a stop-loss price level prior to the implementation of a position.
For an initial stop, I use a point-and-figure chart derived stop, or a Bollinger Band derived stop, usually dependent on which one creates the largest spread, relative to my trade initiation point.
Once I have determined my stop-loss price, I can then easily identify my dollars at risk for each contract I might buy or sell. In gold, if I purchase 100 ounces at $600, and predetermine a stop loss via point-and-figure analysis at $588, I would be risking $12 per ounce, or $1200. ...