RISK SEMINAR

What is risk? It is anything that we do or any situation that exists in the marketplace that increases the likelihood that we will
lose money or the magnitude of our loss.

As you gain experience (not a few days, weeks, or even months) you will develop a trading style that incorporates an
amount of risk that is suitable for you. But until you are a seasoned trader you should make every effort to MINIMIZE the risk
you take. Lose as little as possible when you begin while contemporaneously gaining experience. Trading takes some time
to master. Don’t lose money because you took on risk that you didn’t fully understand. You will make most of your money on
easy plays. There is no excuse to lose money because you did not properly understand and/or limit your risk.

Before every trade you make you should ask: what is my risk? If you cannot identify your risk then you cannot conclude that
the trade offers an excellent risk versus reward. You must clearly determine where you can exit a position if it trades against
you before you enter a trade.

Things We Do That Create Risk

1) Being Unprepared
a. Do you know important support/resistance levels?
b. Do you know the basic profile of the company?
c. Do you know the short interest?
d. Do you know the liquidity? How many shares trade each day
e. Do you know from where the stock has come? Is it up 2000% in the last year?

2) Not having a good reason to open a position

3) Not having a plan for trading a position, particularly an exit plan

4) Being Tired

5) Trading Too Much

6) Not Concentrating

7) Not taking a loss

a. If a stock is moving against you SELL IT. This is trading 101. If you are unable to accept losses there is a 99.9% chance
you will fail as a trader.
8) Ignoring what you see on your screen
a. Shorting a stock in an uptrend that has very minor pullbacks and is rarely printing on the bid

9) Being an analyst
a. Using fundamental analysis to determine the price a stock should be trading

10) Flipping from long to short or vice versa without an excellent reason

11) Trying to make back a loss too quickly

a. Slow and steady always wins the race in trading

12) Trading with too much size

a. Each trader has a lot size where they trade cleanly. When they increase their lot size above that level they tend to make
mistakes. Find a trading style that works for you.
b. Also, the bigger the position the more difficult it may be to get out

13) Trading more than one position at a time

14) Letting your emotions cloud your judgment, trading while angry and/or frustrated.

Limiting Our Risk

1) Avoid high risk situations (see list below).

2) Having a detailed plan for trading a stock

3) Controlling your position size

4) Not flipping a position unless you have a very good reason

5) Reduce your tier size when you are having a bad day

6) Understanding the stock

a. How is it affected by the futures?
b. Is it close to support or resistance?
c. Will it move in relation to other stocks?
d. Understanding how the specialist treats orders in the stock
e. Is the stock priced to perfection?
f. Is there recent or breaking news in the stock?
g. Is the stock illiquid?
h. Do you know the short interest? Be extra careful if the short interest is above 15 percent.

Risky Situations

1. Stock is up on a rumor that it is going to be bought out. If the rumor is denied, the stock will tank.
2. Stock is a momentum stock. And then growth slows or some other negative news hits. This stock can go down a lot
further than you would imagine. It was propped up by the momentum buying. It can go down just as violently.
3. Shorting a momentum stock---It can go up a lot further than you think is possible.
4. A company is being investigated by the government. You don’t want to be anywhere near this one.
5. A stock with more than 50 percent of a short position. Like OSTK.
6. A stock up b/c Cramer chirped it. Could go right back down.
7. A stock that is perfectly priced. AAPL, SNDK, GOOG. Were all perfectly priced and look where they are now. Down
20points, down 30points, down 70points
8. In general, a stock tanking. Don’t catch a falling knife. You don’t have to be the first one in. Wait for support and join the
second move up after it holds.
9. Any stock up a lot during the day. There could be profit taking at the end of the day. An analyst could downgrade it.
10. Stocks that gap up or down huge amounts on the open (over $5)
11. A company that has accounting irregularities
12. A company subject to asbestos litigation
13. A company being investigated by the government

Final thought on risk: When you begin you should never trade a stock if a risky situation is present. The two exceptions to
the list above are if the stock is a momentum stock or the chart is vertical. With them, keep your stops tight and be very
careful