Today's trading lesson is important as it ties to proper risk management. As I mentioned last month and yesterday and I will mention again today, what we have been seeing since March is typical bear market to bull market transition behavior. And, especially during this transition, just because the market is overbought it does not mean it can't become even more overbought. It may not feel that way but the S&P is still 35% lower than it was a year ago and it still has a lot of making up to do.

As I've discussed, options and proper position sizing protect you when a market moves against your position and the rule is if the pain is too great, you either have a position size that's too large, or a hedge that's not big enough.

As you have seen, 16 out of 17 trades in the Model Portfolio have been successful this year. I have no idea how this one trade (or any one trade) will play out but in the grand scheme of things, I execute basically the same plan over and over. Part of that plan is to make to make sure there is not too much size in any one trade to hurt. Also, we'll at times use options to protect the trades. The protection is there for the few trades that move in the opposite direction. Historically though most of the trades using the method we use have been profitable both in testing and also in real trading but again I feel it's always best to use caution and this is done as described above.

When you place a trade, ask yourself “is this the correct position size and/or do I have a hedge in place”? Trading is all about trading strategies with edges, and then protecting those edges.

If you have any questions, please feel free to email me. I can't answer any individualized questions but I can answer general trading questions.

This is from Larry Connors Daily Battle Plan which he publishes each morning. If you'd like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.

Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.