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Managing Risk as You Enter a Stock

There are two major factors that determine how you should approach managing risk as you build a position in a stock. These are general market conditions and the personality of the stock in question.

It is important to examine general market conditions because no two uptrends are exactly alike. They can range from smooth, organized, and powerful in some cases to sloppy, choppy, and highly volatile in others.

manage risk

Remember, three out of four stocks follow the direction of the general market, so considering general market conditions will play a part in determining how risk is handled along the way.

Next, the personality of the stock in question must be closely examined. This is ultimately the single most important factor to consider when it comes to handling risk for any particular stock.

On one end of the spectrum, a leading stock can be extremely liquid, incredibly powerful, trade in a very organized and constructive manner, and show a clear respect for logical areas of support, i.e., key moving averages, the tops of prior bases, prior pivot points, price-gaps, etc.

On the opposite end of the spectrum there are the leading stocks which are also extremely powerful, yet they are less liquid, super volatile, and exhibit wide, loose, and erratic price action. Additionally, they do not necessarily show any sort of respect at or near logical support areas, which is the total opposite of the action we described in the prior example.

Once we have a clear understanding of the general market conditions and the personality of the stock at hand, we can determine the most effective and efficient way for risk to be handled, assuming our goal is to build a position in the stock as it advances.

Now, let’s discuss sell stops. At the end of the day, sell stops are how we protect our hard-earned financial capital and often-fragile mental capital. However, the wheres and whys we use to set sell stops for one stock may differ drastically from than the wheres and whys we use for another. This all comes down to the personality of the specific stock.

Let’s begin by looking at some examples. First we will look at an example of a stock with a personality that can be classified as incredibly powerful, highly liquid, and organized.

Such stocks generally exhibit narrow trading ranges and tight closes. These stocks also tend to show a clear respect for logical areas of support such as key moving averages, the tops of prior bases, prior pivot points, price-gaps, etc.

The first chart up for analysis and discussion will be CVX, Chevron Corp.

I personally find stocks with characteristics like CVX much easier to build a position in, hang onto and manage risk around.

The main reason is that stocks that trade in this manner can be bought into strength and on constructive weakness, while maintaining both tight and logical stops. Therefore, it’s much easier to manage risk on stocks like these as you scale into a position.

Conversely, BRCC is another extremely powerful leading stock, yet less liquid and more volatile, which leads to wider, looser and more erratic price action. This limits the way in which stocks like these can be purchased, which in turn limits the way in which risk can be managed.

There will be times when stocks of this nature can be bought on strength, but much more rarely than in a stock like CVX. In some cases, stocks that fall into this category can be so erratic and volatile that they can only be bought on constructive weakness in order to keep risk in line.

No matter your process, your risk tolerance, or style, I hope that the guidelines I offer in this article for managing risk as you build a position in a stock were in some way illuminating and helpful to your process.

Ross Haber

Ross Haber

Mentored by the founder of CANSLIM Ross Haber leverages years of experience identifying winning stocks and is well versed in recognizing the ones that outperform the general market. He now brings this experience to help you identify these stocks in each Top 10 Report.

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