Taking the Heat

2018-06-22 | Allison Ostrander

Simpler Summary

As summer heats up we’re seeing the market cool down on a small pullback. For those who may’ve been in rising bias trades, you may be feeling some heat in your account. If you find that your anxiety is at a boiling point when taking a look at your trades, you may need to reassess your risk tolerance and position sizing. It’s easy to get caught up adding more contracts and capital into trades in a trending market. However, if you piled on extra risk, and that trend breaks for a necessary pullback, you’ll find yourself scrambling to cool off your account. This is why discovering what risk tolerance means to you is key before any form of trading..

For my account, I developed a 25% rule for risk tolerance. My 25% rule is where I don’t put more than 25% of the account capital into new trades. This 25% of the account allocated to new trades is then divided to open multiple new trades when setups present themselves.This doesn’t mean that all 25% of the account goes into just one trade.

I then take another 25% of the account and leave it as management for any new trade I may open or get behind on. Once again, this 25% is to be used not just on one single management trade, but for multiple management actions if needed for multiple trades.

This leaves the remaining 50% of the account untouched.

By doing this I know I’ll always have money and cash buying power available to me, and know that I haven’t overextended my account.

In the absolute worst case scenario, I lose both 25% of my account on new trades and 25% on management trades. I still have 50% of my account left. From there, I can look back at my trading plan to see where I made some mistakes or overextended.

Then I can decide to look at the original 50% left of the account and take 25% of that into new trades, 25% into management of new trades, and 50% of the remaining account is once again untouched, until I bring my account back to where it was when I started.


If you want to keep your account out of the heat this summer, then take a look at what risk tolerance means for you and your account before automatically increasing your contract amount and capital risk.

Simpler Sentiment

John — Stocks this weeks edged higher initially, with many of the big names making new highs.  But, as often happens when things get a little stretched to the upside, we saw some quick selling back to the mean on W & TH, with Friday seeing both bulls and bears fighting at key levels in the NQ (7240) and ES (2760).  The path of least resistance is still higher, that is not in doubt. The question is, “Are there a bunch of people out there willing to buy at these levels?” The 10 day moving average of the put ratio and the skew say, “No, there isn’t.”  That doesn’t mean the rally is over. It just means it is time to adjust your portfolio to match reality. If you are 100% long, with short dated call options, you will get killed on any pullbacks. However, if you are 80% cash with some honey badger selections and a VIX call debit spread on as a hedge, you’ll do just fine.  Trade responsibly!

Carolyn —  In the bigger picture I have much higher prices as upside targets in the $SPX.  Via the weekly chart, the 2965 area is the target as you can see on the chart below.

To really keep this rally going however, price needs to clear back above the recent high made the week ending 6/15.  This high was made at time resistance and a key extension in price at the 2793 area. Unless we can clear that recent high, this index is still vulnerable to more of a pullback.  This is just one way to look at this index. For more detailed work, I update the lower time frame charts every day for day trades and swing trades with defined risk. This is just the “bigger picture” view via the weekly! Have an awesome weekend


Danielle —  The S&Ps have been rather flat, but this can be expected when you have various sectors out performing, and certain sectors not performing at all. The Dow and NQ have been the stories of the week, with one making new lows every day and the other continually making new highs. FB, NFLX, and AMZN were leading the way, typical market leaders and honey badgers I want to continue focusing on for the rest of the year. I go into the weekend long certain NQ names such as MFST and ADBE but cautious the overall markets at these levels. NQ too high to buy, DOW looking weak and S&Ps right in the middle.

Henry —  Stocks have been especially friendly to bulls over the previous 3 weeks or so – they didn’t quite as much love this week, and that’s ok. Trading, like everything in life is give and take. As long as you’re not giving too much back, I chalk it up to being part of the game.I’ve had a few daily Squeezes, names like HON and CAT that flat didn’t do what I wanted. I covered BA at a good time, but there were a few I gave too much room. I tend to do that when I can risk 100% of what I’m working with. In BA I didn’t want to do that, and that’s a helpful thing to consider when you think about the management of your positions. Outside of that, I do still love these high short interest honey badgers. I finally took SHAK of today and that was a great swing trade. I’ve been in and out of WING, but I’m laying back into that today, looking for a pop higher next week.

Henry Gambel says:

See the original setup HERE

Expert: Henry Gambell 

Setup: Setup on LVS

Update from Bruce: The Long Call suggested on Monday is hovering between break even and a small profit. Currently the chart still looks good with the Squeeze still printing on the charts. Unless we start to break through support, you could continue to hold this trade. If you were not able to get in, you could look at doing so now for a similar price, just keep in mind your Risk tolerance for your account. 


1 thought on “Taking the Heat”

  1. Could you elaborate more on 25% (Existing position), 25% (New Position) and 50% (Untouched) amount on the portfolio. Are you talking about entire capital or just trading capital. e.g I have 30,000 in my tastyworks account. How much ideally should be put in different category. I have other trading accounts, but i use them for long term positions.

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