Have you ever strangled a trade by a few pips and then see it motor along in your direction by hundreds of pips? Or failed to book profit at an opportune time only to see those profits evaporate quickly? I know I have. And if you have been trading for any length of time then I’m sure you too can relate.
How you manage your trades once you are in, is one of the most important factors in succeeding in the trading business.
Most traders (especially beginners) spend a lot of time trying to find that elusive strategy that gives them near 100% winners but spend hardly any time in devising a plan for managing trades once their strategy triggers them into a trade.
Once in trade, do you:
- Wait for either the stop loss or the profit target to be hit?
- Scale out at predetermined points, at predetermined portions of the original position?
- Trail stops by fixed number of pips?
- Trail based on price structure?
- Follow the momentum to scale out manually, based on how you perceive the momentum?
- Move your stops to break-even as soon as possible and then ride the trades until target based on number of pips, on key levels or time in trade is hit
- Follow another method?
As you can see, there could be numerous possibilities on how to manage your trades. If you don’t know what your trade management plan is, chances are you are struggling with consistency in your results. For, if you are not following a well documented, structured approach to trade management, it is very difficult to be sure of the edge for the strategy you are using to enter trades. And if you aren’t sure of the edge, you are leaving results to chance and thus not in your control.
A trade management method depends on a lot of factors such as:
- The market you are trading – The trade management for Gold could be different from say EUR-USD e.g. a 30 pip trailing stop on EUR-USD for an intra-day trade might be good but might not be so for Gold.
- The time frame you are trading in – If you enter a trade based on analysis in say hourly time frame, your trade management should ideally be in the same or larger time frame; else chances are you will not exploit full potential from the trade
- Potential news on the calendar for the day – you might want to define how you are going to manage on days with key ‘market moving news’. For example, one of the trade management rules I have for my trading is to close all my positions before the non-farm payroll. I also know of a well known trader who thrives only on news based trading.
- Your own trading style and psychology – do you place orders and leave them; or watch the trades as they unfold; how you react to gains or losses while in trade?
- Is your strategy based on following a trend or capturing retracements against the trend?
Unfortunately there is no one-size-fits-all trade management formula. One has to devise one’s own method based on the above and many other such factors. Yes it is hard work and requires patience to develop and test it over a period of time.
Whoever said trading was easy money?!
Perhaps the most important tip I can give is: keep your trade management plan as objective and as simple as possible, so that you can execute it without hesitation trade after trade; and know the true edge of your strategy.
Trading the financial markets (Stocks, Forex, Futures, Spreadbetting etc) has risks associated with it. Whilst it can be extremely rewarding, it can also result in losses, which if not managed properly can exceed your initial investments. Before embarking on trading, please ensure you understand the risks involved.