In our first Risky Business blog that you can read here covered what a risk unit is, using stops and risk management, and the benefits of trading with risk units. Today, we will dive deeper into Alphonso's teachings and look at the actual steps to risk unit trading or trading with R's and then touch on using the All or Nothing approach in trading. When it comes to R training, consistent trade management comes from assessing your risk to reward on each trade, and using the R system helps you do just that.
There are five main steps to trading with R's. The first step is to determine the amount an R is worth and then use that amount consistently over a period of one month or your next 20 trades, whichever comes first. Simply put, your R value should be no more than 2% of your trading account. For example, if you have a trading account with $2,500 in it, your R value should be $50, or if you have an account with $10,000 in it, your R value should be $200. This determines your maximum potential loss on any given trade.
The next step is to determine your entry price and then stop price based on your candlestick charts. For example, if you are buying XYZ stock at $30 per share, your stop will be 29.50. The third step is to calculate how many shares or contracts you should purchase by taking your R unit and dividing it by your stop. The fourth step is to identify your stock's target based on your candlestick chart and your calculated R value. Finally, if R to R is at least 3 to 1, then enter the trade when it triggers.
Now, you have entered a trade, but where do you go from here? That is where the All of Nothing trading plan comes into effect. It is a powerful, simple, and effective plan for new traders, which helps you to enter a trade and then forget about it. The best part is this trading plan can and does work over any time frame.
First, you identify your entry price, stop price, and target on the trade you wish to take. Next, you enter when the entry price triggers and set your stop market order at your stop price. Finally, you set your limit order at your target price or at the price point at which you wish to exit the trade. Remember to set your limit order three times greater than your R unit. After everything has been entered into your trading account, you do nothing until either the target price is reached or you are stopped out of the trade. It is that easy.
The All or Nothing approached provides many benefits to any level trader. It removes almost all emotion from the trading equation by providing you freedom away from your computer. Once all your data points are entered, the trade will automatically enter and exit without any interference. This approach is simple to use and effective, and over the course of twenty trades, the All of Nothing plan will outperform any inconsistent plan based on emotions or dollar counting.
However, as with any approach, the All or Nothing trading plan has a couple of challenges as some traders find it boring and not interactive enough for their trading style. They worry about the trade turning against them when it reaches 1.5R and stopping out or what if the trade goes further after reaching your exiting target. This plan is designed as a hand's off approach to keep your emotions out of your trades. Thus, if you sit in front of your computer all day long watching stock charts and undermine the hand's off approach, this plan will fail to deliver results. The reality is this plan is simple to use and easy to follow, which makes it great for beginning and experienced traders alike.
There are many effective ways and paths to manage a trade. Plus, we recognize that trading is unique and personal so please pick a trading style that suits you best. However, regardless of the trading plan you pick, we strongly recommend you journal every trade you take and analyze all your trades' success and failures after you have completed between ten or twenty of them. Then you can make any necessary adjustments to your trading plan. Do another ten to twenty trades and repeat the same analysis process each time. Give it a try and let us know how well you did.