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:
- 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.
- 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.
- 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.
- 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.
- 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.
- Will you add to your winning trade? Will you enter at another price level if your initial entry goes in your favor?
- Will you take profits on the way up and exit in stages?
- Will volume effect your trading plan?
- Will you have a time stop to exit if the trade goes nowhere for an extended period of time?
- Will you have a process that maximizes your winning trades if you catch a trend?