All this week we’ve been addressing risk in trading, and how to limit it.

Today I wanted to focus specifically on how to set your risk live while trading throughout the day.

It’s a simple process that will save you so much money in the long run.

There’s plenty of examples out there that we can go through step by step.

But in my opinion, the best trades to analyze are on company’s that report earnings.

Intel Corp (INTC)’s earnings from Friday is a great place to start. So let’s get right into it…

First, before you even think about defining your risk, you’ll want to get acquainted to what happened with a stock in the pre-market.

This is what INTC looked like…

From this chart, we were able to identify a couple of levels in particular: specifically the pre-market highs and the pre-market lows of the day.

Lows for INTC were holding at $26.78 and highs were at $27.43.

This is a crucial range, as any break past either of those levels would send the stock tumbling down or skyrocketing up.

I suggest when you identify these levels, you draw red lines on your chart so that you can visualize them during the day.

So now let’s look at what happened when the market opened…

What we wanted INTC to do was to do what’s known as a “dip and rip”.

We already knew the stock was down so we were looking to buy it as the shorts covered.

When a stock dips at the beginning of the day back to its levels of support (the pre-market low that we identified ahead of time), it fights to break through that level.

This creates the tension we need then for it to rip up back higher.

Let’s say you waited for this to happen and bought it as it was breaking VWAP as shown in the image below with the white circle…

Immediately upon buying this stock (or corresponding option), you would have wanted to set two stops for your position.

One would have been at the previous candle where the stock jumped up from, and the second stop would have been just below the lows of the day and the pre-market lows.

The fact that the stock tested the pre-market lows and never broke down proved to us that this was a good bullish opportunity.

But even if we think we know what’s going to happen, we always have our stops in play to make sure that if we are wrong, we don’t lose our shirt on a trade.

We risked 20 cents in this case to make potentially one or two dollars per share.

And in this case, it paid off for us as you can see in the chart below…

In this case, we risked 20 cents to make a dollar on the trade.

Buy 100 shares of the stock and that’s $200 in your pocket.

Take that a step further with options and you’re turning a $0.33 contract into $1.20.

That’s $33 into $120. An $87 profit per contract. 10 contracts get you $870.

On one trade.

Trading the way we do, you would have needed five losers in a row to match the gains we made on INTC.

And with every earnings report, you give yourself a chance to come out as a winner.

Let me know if you had any questions on setting stops or defining risk by shooting me an email at I’ll see you all Monday!


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