Trade Management 101

Trade Management 101
Trade Management 101
Picture via Joe Foodie

How you manage your trade will have a great impact on your success as a trader and your profitability. Trades are not as simple as getting a hot tip and then buying. The entry, the exit, the discipline and the risk management have to all converge for success in trading. Miss managing a step in your trading process will cost you money.

Here are the ten elements of trade management:

  1. You must have a entry signal that gives you a quantified reason to go long or short. Your entry should but the odds of a winning trade in your favor. A break out, a moving average, and technical indicators can achieve this.
  2. Your position size must be an amount that removes the risk of ruin on your account if you are wrong. You should trade a size that keeps your emotions from becoming an issue and keeps your ego out of the decision making process.
  3. You must have a stop loss level that if the price goes there then the odds are you were wrong about the entry and need to exit. A stop loss keeps your losses small and prevents you from staying on the wrong side of a trend.
  4. You need an exit strategy to lock in profits. A stop loss will get you out early when a trend starts to reverse and a profit target will give you a price level where you are happy to take profits.
  5. Your trade should give you a risk/reward ratio of 1:3. For example your stop loss may cost you 1% of your trading capital but your profit target could give you a 3% gain on your account.
  6. Will you add to your winning trade? Will you enter at another price level if your initial entry goes in your favor?
  7. Will you take profits on the way up and exit in stages?
  8. Will volume effect your trading plan?
  9. Will you have a time stop to exit if the trade goes nowhere for an extended period of time?
  10. Will you have a process that maximizes your winning trades if you catch a trend?
How you manage your trade will determine your success as much as your original trade idea.