Thinking Straight When You Are In A Trade
Getting into a trade is something that everyone talks about, but what is often overlooked is what goes through your mind once you are in a trade. How do you act when the trade started to move get away from you? What advice can I give you?
Do not add to a losing position.
You might have thought about averaging down on a losing trade (buying some at 1910, and buying some more if it goes down to 1905), thinking that after all, if it was a good buy at 1910, then the same thing must be true for 1905. With the idea that you might be getting a bargain, you may forget to consider that you may be completely wrong, and the market is heading downwards.
Once you see that averaging down is not exactly a proper trading strategy, you’ll be free to consider that once the trade goes against you, it’s probably best to get out. Eventually, a trader would learn that the market won’t be gone tomorrow and that today is the last day to trade for the rest of their life, so making a fresh decision without a position is usually a better option. Sit on the sidelines until another setup appears for you to take advantage of. The markets are open every day. There will be other chances to trade in the future.
It is easy to want to add to a losing position, thinking that if you are long the ES from 1910 and it goes down to 1905 and you buy more, your average price will be 1907.50 so the market only needs to rally to 1907.50 to break even instead of rallying to 1910 again. Its dangerous to think and trade in that way. It may work most of the time, but then the times it doesn’t work you end up doubling up your losses.
Determine a stop and profit goal before entering the trade
If you want to become a good trader, you should be disciplined enough to decide on a stop and profit objective, even before you enter a trade. Sure, picking the right stop point is usually hard, but with proper assessment, you can figure this one out. Just keep in mind the most important thing about this decision, and that is the fact that you should not base your stop point on your personal feeling of what the maximum loss is. The stop should be based on the point where the market implies that you have made an incorrect decision to enter the trade. If that price point is too much for you to lose, then do not enter the trade in the first place!
Also, an appropriate profit objective is likewise a crucial factor in your trading decision. This shall be the amount on which your risk reward analysis will be based on.
Professional traders say that a 65% win-loss ratio is a bit difficult to achieve, so the advertised 80% win-loss ratio could be deemed as an impractical trading method, at least for the professional traders. What you would want is to find trading methods that offer a more consistent profit.
Keep in mind the power of position.
Here’s one thing you should remember about the power of a position – do not make a judgment on the market when you have a position. Once you have entered a trade, you will totally be at risk of having biased judgments. This is why you need to always remember the parameters that you have already set and make sure that you stick to those parameters all throughout the trade.
I am not a big advocate of reversing your position as opposed to just getting out first. However, the best advice that I can give you in a situation where reversing a trade becomes very tempting, is to exit the trade first, and then take a deep breath. After that, decide if you really want to go the other way. It is very possible that you end up figuring out that the reason to get out of a trade is not a good reason to enter in the other direction. Consider the exit as one of your defenses. An offensive decision to enter a trade should be provoked by an entirely different reason.
Deciding to exit a trade should mean that you consider change. Don’t think that you can pick a price to get out at. Just exit the market. Its funny how sometimes traders all of a sudden think they can analyse the market better once they are in a losing trade. If the trade is not working out, get out. Don’t try and convince yourself that the trade will all of a sudden turn around because of your new analysis.
Many times, traders could take a position that seems to not be going the way they thought. Typically, they would be advised to just cover half when in doubt, or just get out of the trade completely to get a fresher look at the market. However, most people resort to giving the market a little breathing room to work its way out. Although they would agree that the trade is not going in a positive direction, they now know that it is possible for them to pick up extra 3 – 4 ticks before heading out. But time after time, the trade moves further away and they end up getting a full loss to their stop. They already knew it was best to get out, but instead of following their rules, they followed that tiny voice of greed and pride that led them to losing the maximum amount.
So to summarize this tip: If the trade isn’t going as expected, just get out of the market!
Trading exposes you to making make-or-break decisions, and if you do not have the discipline of an expert trader, you might end up getting more losses than gains. If you know when to say no, you will avoid losing so much more, allowing you to re-enter the trade at a better time, giving you chances of bigger gains. The major key here is discipline, and your major enemies are pride and greed. Deciding on a trade does not need to be a very major decision, at least not if you’re not prone to making rush and poor decisions.
Capital preservation should be your key thought in trading. Survive to trade another day when you are suffering a few losses.
Happy Trading.
