The biggest questions that I hear from traders are typically questions about finding the perfect entry, and a close second is how to place stops and targets once that order has been entered. While entries, stops, and targets are of the utmost importance, something that I’m typically missing is how to manage the trade once I’m in and before it hits either the stop or the target. Ultimately, this comes back to understanding the power of time.
Any trader who's ever gotten into a position that has “stalled” after entry knows what I’m about to describe. The feeling of dread that creeps in, leaving only a sliver of hope because everything in their gut tells them it’s all about to go against them. This is the point where many traders stay in, having a rule that says to stay in no matter how long it takes to hit the stop or target. This then causes emotional stress that’s only compounded when the stop is hit and the trader feels like they should have gotten out earlier. Over time it may cause a trader to jump out because they feel like they’ve gotten burned, only to see price just before it makes the move you thought it was going to make anyway.
If this sounds like you, don’t feel alone! I’ve seen this in more people that I can count, but there’s a rule to help fix it. The rule I use is called the 6-Candle Rule. The 6-Candle Rule is pretty simple and consists of 3 parts:
1. Upon entry of the trade, if 6 candles on the entry timeframe have passed without price starting to move in the direction of the target, we have to make an adjustment.
2. If the trade is currently profitable, this is the time to move the stop to breakeven and leave the trade open. This gives the trade time to work, but removes the risk of the position.
3. If the trade is currently in the negative but has not yet hit the stop, close the position and move on.
Take a look at the chart below:
In the Nasdaq trade above, we’ve identified an opportunity for a short entry on the 1 hour chart. This predetermined sell area has been found on the 60 minute chart, which means that we have 6 hours for this trade to start moving down from that area. If the short is entered in that area and price doesn't begin to move down, we'd then make the adjustment. If this level is identified on a 15 minute chart, then we’d manage the trade after 90 minutes (6 15-minute candles).
We’ve heard from a lot of our traders that the 6-Candle rule has completely transformed their trading and given them more confidence in their decisions. This rule will take some discipline to implement, but it can be a total game changer in your trade management.