Over the last several months I have been concentrating on risk based trading setups and trends based upon Volume Price Analysis (VPA) tools and also exponential moving average fans.

Risk-based trading setups allow me to determine how much risk we to take in each trade and position size accordingly. Stops are required because if you are only going to assume so much risk, the dollar amount has to be defined and the only way to do it is to establish trades with a stop in place.

When a trade is placed we really don’t know if a stock will follow through because of the crosscurrents in the market. Recently, trading has been extremely difficult because the indexes have been relatively directionless. The NASDAQ Composite and the NASDAQ 100 have held up, but have made little progress. The other indexes, the S&P 400 mid-cap and the S&P 600 small-cap have been stuck in sloppy trading ranges for over a month. This makes for difficult trading because of the lack of consistency, and follow-through in the indexes.

Does mean we need to get out of the market altogether? Not necessarily unless an all-out rout takes place in stocks. If that happens, as a trader, you either need to be short or flat. Capital is too precious to lose by being in the “hope” mode, or giving back profits just because you may have a nice profit condition in a stock. Since closing all positions is not practical for most investors, we need to know what our risk is when we get into a trade.

With all the technical indicators and computer power on our desktops, it seems like trading should be relatively easy, but as you know, that is the furthest thing from the truth about trading. Positions are constantly being evaluated by traders all over the world with different goals and time frames. This is why risk control is the number one consideration as a trader. If we lose our capital, we are out of business.

So how do we control risk? The best way in my opinion is to determine how much capital you want to put at risk on each trade and then position size by buying only the number of shares allowed according to the capital. Before you can get to that point you need to have some candidates, and then look for the lowest risk setups.

This month I am concentrating on low risk entries to the upside. Most of us place long trades rather than short trades, so this is my focus this month.

Ron Brown
Ron Brown Investing,llc