From the December 01, 2009 issue of Futures Magazine • Subscribe!

Trading Management: A Guide

Some believe that in equity trading “the entry is 85% of a trade’s success.” Given the amount of attention most traders give entries, that would appear to be a common belief. There is no question that sound entry logic and precision timing are key to profitable trading, but what you do after the trade also
is critical.

With all due respect to Oliver Velez and Greg Capra, good entries get you in the game, but managing the trade intelligently is what helps you win the game. A lack of trade management planning is the biggest downfall for aspiring traders. It’s not uncommon to enter a trade and then sit on your hands, wondering what to do next. Even worse is making a great entry then coming to the realization you’re lost, and by the time you come up with a plan, your profits have evaporated.

A lack of trade management skills also opens you up to inconsistencies that can plague your trading over time. For example, if you just came off a trade where an otherwise good entry was immediately stopped out just before the market resumed in your direction, you could enter your next trade psychologically biased to widen your stops only to exceed your typical risk parameters on a subsequent loss. Often, when traders lack a trade management plan and miss a move, they overcompensate on the next trade, which results in setting themselves up for disaster by staying in too long.

You need a plan for managing your trades. With a good plan comes confidence, and confidence can be one of the most important elements for long-term success. Without confidence in your methods and your ability to execute them, you’ll never reach your fullest potential as a stock trader.

THE HUMAN FACTOR

A complete approach takes into account entries, exits and trade management, and also the human factor. If confidence is one of a trader’s most important attributes, then the methods a trader uses should, by design, feed that confidence.

Like your trade, equity needs to grow as a result of productive implementation of a sound method, and so does your confidence.

One key to doing this is to find techniques that offer flexibility and fit your own personality, risk tolerance and reward goals. As an added bonus, strategies that best fit your personality will require the least amount of self-discipline to implement. You’ll also be less likely to succumb to emotional impulses that pull you in another direction.

Master traders know that steady profits are the mother’s milk of growing trade equity, while occasional home run trades are what Seabiscuit was to horse racing. Slow and steady profits are as boring as watching paint dry, but they are the building blocks to profits and confidence. Nothing makes a professional feel more satisfaction than to look back at a given trading day, week, month, quarter or year and see a steady flow of winners. An occasional loss doesn’t faze a trader who has experienced a succession of winners because with each successive winning trade, confidence grows to the point where an occasional mistake isn’t financially or emotionally damaging.

Mix that consistency with the occasional home run trade that makes triple-digit returns, or more, and you have the recipe for career-long success.

TORTOISE AND THE HARE

The tortoise was slow, visibly over-matched physically, and prodding but religiously went forward toward his goal. He had the internal attributes of consistency and perseverance, which made up for what he lacked in athletic grace and speed.

The hare, however, was the ultimate symbol of speed. Unfortunately, what no one could see was that he had no self-discipline, focus, sense of delayed gratification or drive. Instead, he wanted to play and be reckless, demonstrating arrogance and assuming he would win against a physically over-matched opponent.

As we all know, the hare’s attitude cost him the race, and he had no one to blame but himself. Like a trader following a foolish trade, the hare may well have had a crisis of confidence and never recovered his racing form.

Your goal, as a trader, should be to take the strengths of both the tortoise and the hare and design a method of trade management. The simplest, and one of the most effective, is to use a system of profit taking and trailing stops combined with simple moving averages (SMA).

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