The 7 rules of trade management

So, you’ve placed your trade. The set-up looks perfect – all you need to do now is sit back and wait for the cash to roll in.

Right?

Well, that’s one way to trade.

I love the ease of a set-and-forget system as much as the next man. And set-and-forget is the best way to stop yourself from ‘meddling’ with your trades.

But there’s a fine line between meddling and managing.

If you can manage your open positions effectively, it can bring bigger profits, lower risk – and a more positive attitude to trading.

But allowing us to click on the ‘trade edit’ button opens up a world of possibilities … where all our insecurities about the market can play out in a series of terrible decisions!

So how do we manage in a positive way?

Fortunately, there is a solution – by making your management an part of your trading plan, you can deal with open positions in an active and profitable way.

Here’s how …

1. The set-and-forget stops and targets

First off, trade management doesn’t mean that you don’t use automated stops and targets on your trading platform. It’s always worth setting these, as prices can zoom off very suddenly, giving you no time to react.

Whatever your trade management strategy, always set a stop loss. And I recommend that you also put a target in place.

2. The unexpected news story

A lot can happen between the time you open a trade at the price hits your target or stop. Fresh news stories are hitting the markets all the time – and sometimes they’ll have a big impact on prices. By definition, news is new, so we can’t have accounted for it in our trading plans.

If the unexpected happens and your trade is still open – reevaluate your position. Is the reason you opened this trade still valid? If not, it’s time change your exit strategy – either close out or move your stop and target.

The effects of unexpected news are a good reason to always have an automatic stop loss and profit target in position – that way, we can profit when the price shoots in the right direction, and we’re protected when it moves in the wrong direction.

3. The expected announcements

Some pieces of news, like regular economic announcements will be scheduled, so it’s a good idea to keep yourself abreast of what’s coming up. And we can plan in advance what we’ll do when they come out (be it avoid trading, close out early, or adjust our trade depending on whether the announcement is positive or negative).

Let’s say that we opened a position early in the day on Eur/USD. We expected it to have closed out within a couple of hours, but this one is still running. It’s in profit, but still just 5 points short our target. It’s lunchtime, and the markets are slowing down ahead of a big announcement from the US Fed at 1.30pm. The announcement could give it the impetus to push through our target, but it could equally send the price in the opposite direction.

I decide to forego those last 5 points and take my profit now. It’s not worth gambling the money I’ve got on the table for just an extra 5 points.

4. Trailing stops

I love the idea of trailing stops. The notion that the market will carry on trending in the direction of my trade, filling my account with cash, while the stop follows behind like a faithful Labrador, locking in those profits.

Sounds perfect.

But there’s a problem.

Large market moves, without big corrections, are few and far between. In general, any market will move roughly within the realms of its average daily range.

Yes, the trailing stop will, every now and then, give you a fantastic profit on a very low-risk trade. But, more often than not, a trailing stop means giving back some of your profits on a trade.

I’m not saying that trailing stops can’t be used successfully, but I am telling you to use them with caution. Don’t fall into the trap of planning your exit strategy around that ‘one time when the market jumped 200 pips’ – it’s letting the tail wag the dog.

The worst kind of trailing stops are the automated ones on your trading platform – these will blindly follow the price up, and very often get you knocked out of a trade on a minor pullback.

A better way to do this is to manage it yourself. Wait until the risk of a pull back has reduced, and then move your stop manually to a sensible place – based on Fib levels, a recent high/low, or a trend line.

But one of the best things about trailing stops is its psychological effect. Knowing that you can profit from future price moves answers a lot of ‘what if’ questions about our trades – that nagging feeling that, if ‘I close now, the market might be about to make a huge leap in the right direction’. Trailing stops allow us to deal with this in a relatively safe way, and if you have a tendency to leave your trades to run too long, they could make your trading more profitable.

5. Scaling out

Scaling out is another technique that can help you as much psychologically as it can in terms of profitability.

You know when your trade is showing a great profit? And instead of feeling like you’re king of the markets … you’re dithering … what if this is as far as the price is going to run? What if the market turns tail now, and I lose those profits? Do you close out, or let it run for further gains?

With partial profit taking, there is no dithering, because this “human frailty” is factored into your plan. You may not be ready to close out your position entirely, but you want to see some of those profits.

The solution – close out part of that position.

You may close 50%, 30%, 20% – whatever suits your plan. Remember, the less you close out, the more aggressive you are being.

This technique can help to limit your risk and heighten your confidence by increasing your percentage of winning trades – if you’re in a winning position, close out half and move up your stop loss to breakeven, this could ensure that the trade will be profitable overall.

(This won’t necessarily make your long-term trading more profitable overall – but boosting your number of winning trades can help you to maintain a positive attitude to your trading, the importance of which shouldn’t be underestimated.)

Taking partial profits also allows you to catch future price movements and benefit from them. On the downside, taking partial profits can also mean that you’re exposed to future downside – for that reason, it is normally done in conjunction with moving your stop loss in tighter.

Another way that this technique helps you is that it reduces your exposure to the market. I’ve spoken in the past about the dangers of sitting on large unrealised profits. It might sound like a nice problem to have – but remember that those profits are at risk in the market. Taking partial profits means that you can bank that money – or put it to work in other investments.

6. Risk management

If you’re using scaling techniques to actively manage your live trades, you’ll probably be opening multiple orders. Watch out that you aren’t upping your risk levels. If you have to open two orders in order to exit them at two different price levels, make sure that you’re using half stakes and not doubling your risk.

7. Planning

Whatever techniques you’re using, don’t use active trade management as an excuse for sloppy trading. The levels at which you’ll take profits still need to be predetermined – this isn’t a license to trade by the seat of your pants! The use of trailing stops and scaling out can be incorporated into your trading plan. And how you’ll react to news stories or announcements should also be thought through.

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