Monday, August 31, 2009

Managing Your Trades

My recent post illustrated how I think about profit targets and stop loss levels. Once you have those nailed down, it is much easier to think about the management of your positions.

Among the trade management issues important to think through are:

* When, if at all, you move your stops and targets;

* When, if at all, to add to your positions or start scaling out of them;

* When, if at all, to hedge positions.

I generally have found that, especially among portfolio managers, trade management accounts for as much profitability as the quality of the initial trade ideas. I also find that, among proprietary daytraders, much money is lost through poor trade management, as traders add to positions at the wrong times or scale out of them too quickly.

The importance of trade management comes from the flow of information that occurs *while the trade is on*. If you're attuned to that information, it can help you decide whether to become more or less aggressive over time by moving stops and targets and/or scaling in/out of positions by adjusting your size.

If you think of your trade as a test of your market hypothesis, you constantly want to be thinking about whether the most recent market action is confirming or disconfirming your expectations. It is when you're right and see that the market is proving you right that you can best press your advantage.

I find it is particularly helpful to have explicit rules to aid trade management. I will offer a few of my own in the Wednesday seminar and in future posts.


Dave said...

There's no question about this, Brett. Everyone focuses on entry points, but there's a lot of potentially stress free rules that you can implement after you enter a trade that can make serious contributions to your bottom line.

For example - I've found that implementing a target at a certain level in one of my systems makes me 40% more profits in the long run.

Gro said...

Maybe a bit off-topic but I have designed my setups' rules like this :

* Description of the setup (what is behind the idea and what the setup aims to do)
* Indicators used and time frames
* Conditions (things to observe until I can say "this is setup A") : the mandatory ones and the optional ones.
* Position Sizing : how much I should take when entering the trade and how much I should add
* Entries : when/where to enter the first trade and when/where to add to the trade
* Targets : when/where should I exit and how much
* Stops (I use stop all the time, no mental stop) : initial stop and when/where/how much to move the stop when the trade goes my way (expressed in % of the position)
* Notes/Misc : various notes about the setup (e.g. how long the trade can last when successful, what to observe during the move, etc...)
* Examples : a list of links to previous logs of past occurrences where I traded (successfully or not) or even simply observed the setup happening in the market
* References : various blog posts related to my setup (often various links to TraderFeed, AfraidToTrade or SMB).

This has helped me a lot identifying my weaknesses for post-trade analysis but also helped me not to panic (like "OMG, the market is moving against me, should I exit prematurely ?").

Maybe that will help others, I don't know.