Chapter 10

Fail Fast: Managing Risk


Bullet Getting the scoop on risk measurement and management

Bullet Avoiding losses at the individual stock and portfolio levels

Bullet Crafting your exit game plan

If you’ve ever seen the popular 1984 film The Karate Kid starring Ralph Macchio and Pat Morita, you may already know why this chapter is the most important in this book. In the film, karate master Mr. Miyagi teaches the timid teenager Daniel Larusso martial arts. But instead of beginning Larusso’s training with how to throw a right hook or how to do a round kick, Miyagi stresses defensive techniques. “Wax on, wax off,” he tells his student. The lesson is that you must block your opponents’ punches and kicks or you won’t last very long in a fight.

Believe it or not, swing trading isn’t that different (fortunately, there’s no need to train by waxing cars). I believe that the biggest determining factor of whether you’ll be successful as a swing trader is how well you’re able to implement your own risk management system. All too often, managing risk gets relegated to one or two simple rules of thumb: diversify your holdings and limit your investment in a single security, and all should be merry. ...

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