Confirm and Conform : A Risk Management Strategy

JC Parets
May 29, 2021

As Technical Analysts, our primary goal is to identify the trend. If it's headed higher, it's positive. If it's headed lower, it's negative, and if it's stuck in between, it's sideways.

Sounds simple? Well, sort of.

As traders, your primary goal is to make money. Yes, we're all here to learn, but isn't the goal also making money?

Follow the trend, trade/invest accordingly, and book profits.

Sounds simple? Well, not so much.

Risk Management is probably the most important and the most undermined concept in the market. A great plan can turn into a disaster with bad execution. An average plan can turn into a success with good execution. It's the execution of the plan. That's where the magic happens.

What is Risk Management?

It is the process of identifying your goals, time frame, and risk capacity and then making a plan that suits your individual needs with regards to market risks.

Why is this important?

To minimize losses. That's the short version of saying: to protect your capital and maintain a healthy portfolio that generates regular returns.

How can risk be managed?

This is where we use the practice of Confirm and Conform.

The first part of this is Confirm. This part is important because this is where the signal is generated. This is where the price confirms a particular break out or trend. Following this, a position can be taken.

For instance, let's take the case of the following chart:

The price has moved close to its resistance and the indicator is in the bullish momentum zone.

The question is, should we buy here?

If you're someone who likes to take chances, then you wouldn't mind. If you're someone who prefers confirmation, then you'd prefer to wait.

That's because two things can happen here. The price can either break out or fail and rollover.

Since the price has a mind of its own, we prefer to wait for a confirmation in price in order to initiate a position.

Now let's assume we've received our confirmation. What do we do next?

The next step is to Conform. Conform to the rules and regulations that you outlined for yourself when you set your goals.

If your exit is when the price closes below your risk management level on the daily chart, then exit. If it's the weekly closing that you prefer, then follow that. Take responsibility for your money and your actions and be diligent with your process.

The more successful you are in taking away emotions from this process, the better your portfolio will fare! If every profit or loss will lead to euphoria or misery, then the market is going to be bad for your health and good for your doctor.

Yes, there will be times when the market whipsaws will generate false signals and lead to wrong entries/exits. But despite that, it is your system that will protect you from all these mishaps!

Focus on the system, and market moves will cause no harm!

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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