Wednesday, January 06, 2010

Trade Management: Key Questions to Ask

Some of the most important decisions a trader makes occur after the position has been entered:

* Do I scale into the trade, out of it, or stand pat?

* Do I hold a trade for the next target or exit when we hit the first target?

These questions of position management reflect whether we gain or lose confidence in our idea as the trade is progressing.

This morning I had a high conviction trade buying ES when I saw that we absorbed the employment news well. As the trade progressed, however, I saw low volume and lack of upside conviction in several indexes and sectors. That reduced my confidence in the idea, so I did not scale into the position. We did not hit price levels that suggested significant weakness to me, so I did not scale out of the position either.

Once we hit the first target, I questioned whether we were seeing enough volume and strength to justify holding for a higher target. That eventually led me to exit in that target area after giving the market a couple of opportunities to break to the upside.

It's not just your confidence in a trade, but whether confidence grows or wanes that determines how you manage the position--and how much money you make.