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TheNegotiator

Active Vs Reactive Trade Management

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Approach to trading is all too often a one-dimensional activity. "I will look to buy at X and take profit at Y" might be said approach. Now I know many will understand the idea that an entry is an entry, but trade management is probably much more important to your bottom line. However, I know for new traders at least and perhaps some who have been around for a while longer, the method of exiting a trade is frequently overlooked. The reason for this is simply that if you can't pick a trade, how are you gonna manage it? You have to find a decent way to select your trades before you can appropriately manage them.

 

Anyway, once a trader has a way to select a trade which in a good number of cases gets them onside, there is another issue. How to exit the trade. Not just where your targets are. But more importantly, where you abandon ship when things aren't looking terribly promising. This is perhaps one of the most important aspects that a trader needs to address if they either A) do not wish to or B) are unable to take multiple "scales" on exit (to scale = to close a small portion (or enter a small portion) of a trade). How many times do you see what looks like a decent entry turn and run against you? Does this need to happen in order for you to remain in a trade when it would turn out to be a good one?

 

The market is always testing. Testing balance, testing imbalance. If for example you take a continuation trade, it tests the last known extreme before continuing or balancing/reversing. If the market struggles to extend through that point, isn't it sound logic that there is still opposing interest and so a deeper counter rotation might be necessary? If this is the case, wouldn't it make sense that your position is potentially under threat? Simply exiting at this point doesn't necessarily make sense to me, although if you were from the scaling camp, then you might take something off when presented with this situation. Either way, you should be on alert. Alert that if then, counter trend activity increases and prices thrusts against you, there is a good chance that you'll be seeing a retest of at the very least, the location of the attempted point of continuation.

 

The next thing to point out, which every risk conscious trader must be aware of, is when you take a trade what is the accuracy and quality of your trade "location"? Is it close to where the market turned? Is the turn close to where you had expected a possible turn to materialise? Was the turn well received? I.e. did it move effortlessly away from the area or was it a struggle? With this, you will have a better idea of how swiftly and decisively you will need to act.

 

Finally, if activity does then reverse and give you a clear signal to exit, you have the chance to cover before the market forces you to by your risk plan. i.e. when your stop is hit.

 

I trade in a certain way and by no means is what I am describing suitable or even relevant for everyone. However, I'd suggest to all traders to look at some sort of early exit method as a contingency plan as turning many small losses into small winners can make a big difference to your bottom line.

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