Correct Answer: A profit loss ratio is calculated by your average winners vs your average losers. If you lose $100 on average and you make $200 on average, your profit loss ratio is 200:100, which can also be said as simply 2:1. You can find out your profit loss ratio by taking the average of all your winners and comparing it to the average of all your losers. Divide the average winners by the average losers to get your profit ratio. Profit ratio is always vs 1. (200/100 = 2) or (150/100 = 1.50) If you want to brush up on the Profit Loss ratios, you can check the Profit Trifecta video that's part of the Course Contents.
2) What metrics does every trader need to have in order to be profitable?
Correct Answer: Every trader at a min needs metrics that gives them a break even. So a 1:1 ratio with 50% accuracy is breakeven. That means anything higher is profitable, anything lower is losing. Having said that, if you have a profit loss ratio of 2:1, you only need to be right 33% of the time. So accuracy and profit loss ratio are closely tied together. I encourage students to aim for 2:1 profit loss ratio knowing that if they are right 50-60% of the time, they will be profitable.
3) What methods can be used to manage risk?
Correct Answer: There are a number of methods that can be used to manage risk but I encourage all students to focus on having a max loss on every trade. That means you enter a position knowing your max loss is lets say, 20 cents, with 1000 shares that $200. You can use hard stops (live stop order) to keep your losses tight. Additional methods to reduce risk would be trading strong stocks, avoiding penny stocks, and avoiding stocks that don’t have high relative volume.
4) How are you going to enforce max loss per trade and max loss per day?
Correct Answer: There are certainly a number of ways you can enforce a max loss. I would encourage you to call your broker and ask them to put a max loss on your account. If you are down more than X amount, let's say $1000, you can’t initiate any more trades for the day. I would also create a set of rules for your trading, and if you break those rules, there is a punishment. My punishment is running 5 miles for every broken rule. (I don’t break rules anymore because I don’t like running!!
5) What is going to be your approach for managing risk?
Correct Answer: Like the previous question, there are a number of ways to approach managing risk. You need to find one that is a good fit for you. This may mean testing out a few strategies until you find one that works. Although live stops and trading strong stops certainly help, the emotional challenges of following max loss can be hard. Make sure you practice mindfulness during your trading.
6) What is Halt Risk?
Correct Answer: Halt Risk is the risk that a stock can get halted and while it’s halted you cannot trade it. You simply have to wait. Stocks can be halted for 5min, or for days or weeks. Generally we see 5min circuit breaker halts, and these are the result of a stock moving 10% in less than 5min. This is not the worst thing in the world. Getting caught in a news halt can be more stressful. I try to mitigate halt risk by holding stocks for shorter periods of time.
7) What is Float & Spread Risk?
Correct Answer: Low float stocks are often very volatile, and they often have larger spreads. This means if you get in the ask might be 20 cents higher than the bid, meaning you would immediately be down 20 cents if you market order to exit the position. I mitigate large spreads by typically trading with smaller size.
8) What is Slippage?
Correct Answer: Slippage is the difference between the price when you press the buy or sell button, and the price you get filled at. Slippage is present in all stocks and all price ranges, but is higher on stocks that are experiencing extremes. To control slippage I use limit orders instead of market orders.
Correct Answers:
1) What is float?
a. Float is a drink with Milk and Ice Cream
b. Float is the number of outstanding shares available to trade
c. Float can greatly impact the volatility of a stock
d. All of the Above *CORRECT
Correct Answer: D) is the correct answer since all of the above are correct. A) is correct because as you already know, a Float is a drink mixed with Milk and Ice Cream. B) is correct because the Float, as defined by traders, refers to the number of outstanding shares available to trade. C) is correct because float can dramatically impact the volatility of a stock. Stocks with floats under 10mil shares can be extremely volatile. I'm typically trading stocks under 25mil share floats.
2) How long does a circuit breaker halt last?
a. 10min
b. 15min
c. 5min *CORRECT
d. 60min
Correct Answer: The correct answer is C). Circuit breaker halts are 5min long. Although there are certain instances when circuit breakers could be longer, the majority of the time we see the standard 5min circuit breaker halt. Remember when stocks are halted pending news, or pending SEC investigation, they can be halted for weeks or even months.
3) What can cause a trading halt?
a. A move of more than 10% in less than 5min
b. A company announcing breaking news
c. SEC investigating a company
d. All of the Above *CORRECT
Correct Answer: The correct answer is D), All of the Above. A) Is a correct answer because anytime a stock moves more than 10% in a 5min period it can be halted for 5min on a circuit breaker halt. B) is a correct answer because a company can request the exchanges halt shares while they release material news. C) is correct because the SEC can halt trading of a stock while they conduct an investigation or request more information from the company.
4) What is the leading cause of failure as a Day Trader?
a. The inability to manage risk *CORRECT
b. The lack of capital
c. The Pattern Day Trader Rule
d. Not having the correct tools
Correct Answer: The correct answer is A). The leading cause of failure a trader is an inability to manage risk. As you have seen from my small account challenges, you can make money trading even if you have a very small amount of capital. Although not having the right tools is certainly a problem, not being able to manage risk is far worse.
5) Trader A says we can greatly improve our odds of success by selecting the right stocks and chart patterns. Trader B says we can greatly improve our odds of success by applying the fundamentals of risk management. Who is correct?
a. Trader A
b. Trader B
c. Both A and B *CORRECT
d. Neither A nor B
Correct Answer: The correct answer is C). Both Trader A and Trader B is correct.
6) Trader A says if you have a high profit loss ratio you can’t be wrong a lot and make money. Trader B says that the profit loss ratio you trade with directly relates to the percentage of success required to be profitable. Who is correct?
a. Trader A
b. Trader B *CORRECT
c. Both A and B
d. Neither A nor B
Correct Answer: The correct answer is B). Trader A is wrong when he says that you can’t be wrong a lot if you have a high profit loss ratio. If you have a high profit loss ratio you can be wrong as much as 80% of the time and still be profitable. The profit loss ratio directly relates to the percentage of success required to be profitable.
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