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.