My approach from over 30 years of experience.
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In today’s video, we discuss another important aspect of trading—Trade Management. Continuing on from the previous video where we discussed factors I consider when entering trades, the next step is even more crucial, your overall success depends on how you deal with situations that arise after you take the trade. The loss you have to take if the trade goes bad, or the patience you need to get maximum gains out of a winning trade.
First, let’s understand what many traders get wrong. Trade management is more about psychology and less about rules and frameworks. Before entering a trade, when you do not have a position, you are merely a spectator, and market volatility is more entertainment and less business. There are, of course, times when market movements impact you psychologically and lead you to take emotionally charged trades. But, this can be minimized and eliminated quickly, by just following the process and instilling the requisite discipline.
On the other hand, once you have committed capital, the equation changes drastically. The up-and-down ticks have a strong psychological impact that can lead you to either act in haste to kill a trade too early or act too late, taking a much bigger-than-planned loss.
Now, let’s get into the details of trade management.
First thing first, we need to have some basic rules in place to deal with the trades that go wrong, because the whole trading math is dependent on it. You need your losing trades to eat less of the profits from winning trades, which is why you need to get very comfortable with taking small losses. This is reflected in the Risk to Reward element of a strategies performance. My longer term trading results for example can be seen here. My losing trades, on average, lose just under 7% of the position, whilst my winning trades average a return of over 24%, equating to just under a 1 to 4 risk to reward.
The first part of the equation is managing the losses. As I strongly suggest on my channel and to the members of our group, the stop loss should be pre-determined before entering a trade. Also, as a trade management and risk control rule, the trade should be closed as soon as the stop loss condition is met, without deviation.
There are times when traders experience frequent losses. This can be heart-wrenching for new traders who aren’t used to such situations and are over exposed. Although it’s ok to experience these losses to speed up the learning curve, just be mindful that the losses should be small.
If you are experiencing a higher occurrence of stop losses i.e. The win rate is low, it’s essential to check a few things..
1. Is your stop loss too tight? – A stop should have an allowance for some volatility.
2. Is your trade entry wrong? – Was it too early or too late from the structure identified?
3. Is the market hostile? – Remember the saying: “A rising tide lifts all boats”? well the same is true for the opposite, “A sinking tide lowers all boats”. In such a situation, lowering position size or reducing trade volume could be the answer.
It’s always better to go back to the drawing board in tough times, rather than fighting the market to make it all back in the next trade, which will only increase the chances of failure. The easiest thing you can do at these times is to trade light and learn before your trading gets back on track.
Coming back to the stopped trades, I exit my trades as soon as the stop is hit, which is advisable to everyone. You can however, improvise on this aspect by choosing to close the trade if the price closes the day or week beyond your set stop loss. Or, you can have staggered stop losses to give your trade more time to perform. Whichever approach you take, the most important thing is to execute the plan with discipline and not get into the hope trap.
The problem with improvising or deviating from your trade plan is many fold, generally it points to a lack of discipline, but perhaps more importantly you lose consistency, and when you lose consistency you lose any form of predictability in the future. I often lean towards my equity curve to demonstrate. You can see here that I have had lackluster periods of performance, during these periods it would be easy to flex the rules thinking that something was wrong, but once you really understand your approach and its past performance it allows you to stay disciplined, knowing that consistently applying the strategy provides some predictability and confidence going forward.
Let’s move on to dealing with profitable trades.
Every profitable trade unfolds differently. Some will generate immediate returns, others may hover between the entry point and stop-loss before taking off, and some will steadily move into profit. How you respond to these varying scenarios is crucial and something we will address shortly. But first, let’s explore another common dilemma traders often face.
Once your capital is fully committed, you’ll likely continue your daily and weekly screenings, uncovering new opportunities. Sometimes, these new prospects might outperform the positions you’re currently holding. This can lead to emotional responses towards your active trades. In such moments, it’s vital to accept the missed opportunities and remain disciplined. Allow your trades to run their full course—whether they hit your target profit, stop-loss, or, if applicable, reach a time stop.
When dealing with a profitable trade you can choose your course of action depending on your objective. For example, if you aim to achieve an average reward-to-risk ratio of 3-to-1, you can exit your full position once the ratio is achieved. Or, if you want to squeeze the trade for more profits, you can exit half or any part of the trade when the target ratio is achieved and trail the balance using an indicator, price action, or a mix of both.
Alternatively, if you're a patient trader like me and prefer to maximize the profit potential of a full position, you might choose to give the trade more room to move, especially when the company's fundamentals remain strong and nothing significant has changed. The downside to this approach is that you may need to sacrifice some profits if the price doesn’t move higher as expected. Like most strategies, there are pros and cons to consider.
Through extensive research, I’ve developed a strategy that helps me stay in trades during consolidations. By combining indicators with price action, I can adjust my stop levels as the price progresses. This approach also enables me to differentiate between normal consolidations and those that are too weak to justify continued patience. Specifically, I rely on the crossing of the mack dee indicator to guide my decisions.
For example, in this trade with Inter Parfums, after our entry at the breakout from a lateral consolidation, the stock rallied $20 over eight weeks—equivalent to 2x the risk we took on the trade, as our initial stop-loss was set at $10 within the consolidation. During this period, the stock dipped close to 10% in another consolidation. Many traders might have made the mistake of exiting at this point, watching their 16% profit evaporate in a week. However, this consolidation turned out to be a temporary pause, as the stock bounced back and continued rallying with similar consolidations along the way.
Our trade management approach did not flag this consolidation as concerning. It was a later consolidation where we were alerted. The dip during that phase coincided with the weekly MACD crossing below the signal line, indicating waning momentum. In response, we raised the stop-loss just beneath the wick of the candle that closed after the crossover. This triggered an exit soon after, and the stock has since failed to advance.
In this case, the price remained in limbo for over a year. Our strategy saved us from being stuck in the stock by triggering an exit early on. Although staying in the trade wouldn’t have caused a financial loss, the opportunity cost was significant, as many other opportunities to compound our equity passed by during this time. While we did miss part of the move after the high due to this early exit, I consider it a necessary sacrifice to capture as much profit as momentum allows before it fades.
The other crucial aspect of trade management is navigating the psychological challenges that come with it. With money at stake, and life’s other stresses often intersecting, it becomes difficult to maintain discipline. You might make mistakes such as panic selling during a small dip or buying in fear when prices surge. Even worse, you could over-leverage yourself at the wrong time, amplifying your losses.
The first step to course correction is to treat trading like a business and be patient during the time it takes for that business to grow. The second step is to establish a set of rules and consistently follow them. My approach is built on a foundation of these rules, designed to address every aspect of trading. With the approach, I remain in control of every trade, regardless of the market's movements. This eliminates the need for emotionally-driven decisions that could jeopardize the success of any trade I take.
For those looking to follow my trades, use my scanner, or simply want to join our fantastic group of likeminded traders, feel free to use the links below.
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