1. Risk Management
(a) 2% rule
Only put at most this much of your portfolio so that it is manageable. For example, if portfolio is $100,000, you should only invest $2,000 in a single position. That actually seems kind of high.
(b) Stop-Loss and Take-Profit
Former is important if the price breaks below support level, it's good to sell quickly.
The latter can be useful if price is nearing resistance levels and trader wish to take profit before it consolidates back down.
Stop losses should not be closer than 1.5 times the current high-to-low range (volatility), as it is likely to get executed without reason.
This can be calculated using the following formula:
[(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]
The result of this calculation is an expected return for the active trader, who will then measure it against other opportunities to determine which stocks to trade. The probability of gain or loss can be calculated by using historical breakouts and breakdowns from the support or resistance levels—or for experienced traders, by making an educated guess.
2. Resistance and support
To identify support or resistance, you have to look back at the chart to find a significant pause in a price decline or rise.
"Let’s imagine that Jim notices that the price fails to get above $39 several times over several months. Traders would call the price level near $39 a level of resistance."
(a) Trendlines (Slope)
To be a valid trendline, the price needs to touch the trendlines at least three times. Sometimes with stronger trendlines, the price will touch the trendline several times over longer time periods.
In an uptrend, the trendline is drawn below the price, while in a downtrend, the trendline is drawn above the price.
The support/resistance of an identified level, whether discovered with a trendline or through any other method, is deemed to be stronger the more times that the price has historically been unable to move beyond it.
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