I’m not going to separate them into two sections. Just figure out which
applies to your situations as you read them. A winning and losing trade
can be looked at the same way depending on how long you have held a
position. A winning trade that gives back too much profit is no worse than
a losing trade. You don’t want to give back too much on a winning position
by overstaying your welcome. Even if you close it out as a winner, if you
gave back too much, in my eyes it’s a bad trade at least for the last part of
the trade. Though I prefer to review my winners first, it doesn’t matter if
you do them or your losers first or if you just go down your list of trades
in the order that you put them on. Whatever way you do it, just be sure to
give them all their fair due. If you are a day trader who closes everything
out at the end of the day then the next few pages may not be necessary, but
you paid for the book, so the read them anyway. If you trade one market
or stock, the reviewing part will go faster and then you could meet John at
Moran’s quicker. As you do go over every trade keep in mind that the main
purpose for doing so is to prepare for the next day’s game plan.
Why Did I Make the Trade?
The first thing I do when I look at my open trades is to start with ones I put
on most recently. I ask myself, “Why did I make this trade?” Throughout a
trade’s history you need to keep making sure that it is within your plan’s scope. I want to make sure that the trade is part of my trading strategy and
not some randomly put on trade. I want validation that I made the trade
for a proper reason. If I did, great, I can move on; if not, I want to make
sure it fits into one of my strategies. If it doesn’t, I’ll look to get out as
soon as possible, as I do not want to hold a trade that contradicts my basic
principles. Sometimes during the heat of battle of the trading day, you may
make some random trade and then not get out of it because you had no
plan for it. Hopefully this doesn’t happen often to you, but when it does, be
aware you are doing something wrong and remedy it as soon as you can.
Do the Reasons You Got in Still Hold?
If you shorted the Dow Jones because the 3-period moving average crossed
below the 10-period one as in point A in Figure 7.1, make sure it’s still the
case. If it’s not, it’s time to reevaluate the trade. Don’t wait until you are
stopped out to get out of a trade that isn’t working, if things have changed,
it’s okay to get out. In Figure 7.1 if you got out after the 3-period moving
average crossed back over the 10-period one, instead of waiting for the stop
to be elected you would have saved yourself about 200 points.
If it’s still within the parameters that got you in, look to see if they may
be changing, so you can anticipate an exit. Maybe the trade is still good but
FIGURE 7.1 Daily Dow
Source: © TradeStation Technologies 1999. All rights reserved.
it’s getting close to not being so, so you may have to watch it more carefully
tomorrow. Make a note of this and keep it on your radar screen (I’m not
referring to TradeStation’s radar screen but to your personal one). Make
sure if a trade is getting close to being one you have to exit that you are
on top of it. In the example in Figure 7.1 you can see the 3-period moving
average turning up and the highs of each bar getting higher prior to the
crossover at point B. This could be a sign your trade may not be within
the reasons you sold it for much longer, so you can start getting ready
for action.
Is It Simply Not Working as Planned?
Another thing you should monitor is whether the trade is working like you
planned. Yes, it could still be within your parameters, but maybe you were
looking to get a quick move on the trade and after three days it’s been stagnant,
not doing a thing. You need to consider whether you still want to hold
and monitor this dud? Your time and money could maybe be better spent
elsewhere. So why not get out? The trade is not doing what you wanted it
to, so you can consider moving on, though before you do make sure you
gave it an opportunity to work. If you look at Figure 7.1 again you’ll see this
as well. Assuming you got filled on the short at the first circle, the market
did nothing for the next few days. You expected it to go down right away
and it hasn’t. Even though the moving averages are still confirming a short,
you may consider getting out as it’s simply not performing as you’d like it
to, especially on the fourth day. At this point, you gave it time to work and
it didn’t and now it looks like it may pop back up.
Is It Close to the Target Area?
Once your trade starts getting close to the target area that you should have
established when you put the trade on, you should begin to monitor it more
closely. The target area can be a number, like when the market hits 13,541
or it can be a technical target as in when the market reaches the top of a
channel. It can be a time target as in exit after seven periods. Whichever the
case, you want to be aware that it’s getting close so that you can get ready
to act on it the next day if the target is reached. You may, after reevaluating,
consider moving the target, which is always an option, but make sure you
have a reason for it if you do. In Figure 7.2 I used Fibonacci projections
based on the up trend that started in July, to pick a target for a long using
a breakout of a previous high. As soon as the market gets within about two
normal days range from this target area (13,531), I would monitor it much
more closely to determine when I need to get out. One thing you need to
be on the lookout for is that it may fail to reach the target, in which case
you need a backup plan as to what to do. I do this by constantly moving my
stop up in a big move like this.
Has It Reached the Target Area?
Not only do you have to look to see if a trade is near its target area, you
should also keep an eye out for trades that have already hit your target
area. Let’s say the market traded through a channel you had set as a target.
You didn’t exit because maybe the move was strong and you wanted to let
your profits ride, which is a valid excuse. You now need to reevaluate the
exit points. Should you come up with a new target and stop areas or should
you get out, because your original level was hit? You could maybe keep the
trade and use your old target as your new stop. You really want to be on
top of a trade like this because there is no worse feeling then having a trade
reach its target and then some, then getting a little greedy and before you
know it goes against you and it turns into a loser. These losers are hard to
exit because you keep thinking it will come back to the best levels of the
trade and you end up just watching it fade away. Let’s say in Figure 7.2 you
did not exit at the target level and now the market is trading in the second
circle. You need to now reevaluate the trade as a new trade and determine
if you’d like to keep it as well as make a new target (target 2) and create a
new stop level (stop 2). You may introduce new technical indicators to help
you decide. I personally would have gotten out the second time it dipped
below the 13,531 level. I would have given it one time to test the level and
if it dipped below a second time I would exit. The reason being that I gave
it a shot to work and it didn’t right away, and it has already reached the
target so why not get out?
Is It Approaching a Stop Level?
Just as when the trade is getting close to its target level, you also should
be aware of any trades getting close to their stop levels. The closer it is to
the stop point, the more you should pay attention, or maybe paying less attention
is the better way to say it. Thinking too much about stops is a great
way to cancel or move them, as the market gets closer to them. Sometimes
your stops are mental and now is the time to either place them in or really
watch the market so you can exit it if it does hit the level. If you are
near a stop level, I recommend putting the stop in and forgetting about it.
Do not try to second-guess it. If your original stop was well thought out,
there is little reason to move it as the market gets closer. Most of the time
you will end up losing more money by moving or ignoring a stop. You do,
however, need to go over, review, and adjust stop levels on a regular basis.
But I would not be moving them further away as they get closer for fear of getting stopped out. Look at Figure 7.3 and you’ll see two different scenarios,
the first is the long from the first shaded circle, which is the same from
the previous example. As the market started getting better I would move
the stops S2, S3, S4, and so forth, up along the with moving average until
eventually the market catches up to it at S7 and you get stopped out; this
is the proper way to move a stop. The wrong way is the other example.
Say you shorted at the arrow marked Short and you placed a stop (Stop1)
above previous highs. But a couple of days later the market rallies strong
(oops). Now instead of leaving your stop in and taking it like a man, you
move it up to Stop 2 to give the market room to breathe. All you are doing
here is costing yourself 200 more points for no reason. As the market
reaches the stop level you have reasoned to be good, leave it alone. I’ll get
into this in more detail later in the book.
Did You Ignore Stop Levels?
This section assumes you are a moron and let the market go through the
level where you should have placed your stop. I’ll discuss it later in the
book, but you should not make a trade unless you know where you are
getting out on both the winning and losing side. Maybe you had a mental
stop, but froze and never put it on, or worse, you never even thought about
one and just hoped for the best. Maybe you’ve been in the trade for a while
and are making money and got a little lackadaisical moving a stop along to
lock in a profit. Regardless of the reason, if you ignored a stop you need
to put this trade on your “I must get the hell out of it soon” list and make
sure you are on top of it first thing in the morning. If you go back to Figure
7.3 and for some reason you let the short keep going and did not enter
the stop at Stop 2 and now it’s trading above that, you really need to force
yourself out of the trade the next day. Cutting your losses is something you
need to learn and emphasize as you are making your game plan every day.
Ignoring stops will definitely lead you down the wrong path, so should you
find yourself in a position where you did ignore one and are now in danger,
do not sit there and hope for the best; instead, get out and take the loss.
Should You Add to It or Cut Back?
Position size is another decision you should be thinking about as you go
over every trade. If, as in the example in Figure 7.2, the market reached
your target area and the trade is still working, why not take off some of
the trade and lock in a little profit, but keep a little if you think it still has
room. Maybe, on the other hand, it’s earlier in the trade and the market
just broke above the Break Out X line. Here you can have another strategy
that kicks in when you break out of this resistance level. You are already in
the trade with a nice profit and now you get confirmation of a strong trade
with a new signal. In this situation you may want to consider adding to the
position as the trade just got better in your eyes.
What, however, if the trade isn’t really working as well as you had intended
it to, but you don’t want to get out in case it does take off? A good
strategy here is to reduce the size of the position while still holding onto
some of it, just in case it does end up working. Cutting back and scaling is
one of the hardest things to do in trading, as you can probably make a case
for both sides in every instance. No matter what you do never ever forget
the cardinal rule of never adding to a loser.
Is Your Money Better Spent Elsewhere?
A part of the thinking process in the above scenarios when deciding on adjusting
position size is that if you take off a portion of your trade, it will
free up money to be used elsewhere. As you go over every trade keep that
in mind and ask yourself, “Is my money better spent elsewhere?” If the
answer is yes you may be better off getting out and putting on a different
trade. Or at least keeping money on the sidelines for when a better
setup does come along. You should not be in the habit of being maxed
out, but many new traders have limited funds and can quickly reach their margin levels. Freeing up some money then becomes part of their everyday
game plan.
Should a Trade Be Closed Now or Held Longer?
Which leads to the question, “Should I hold or get out?” If you have a purely
mechanical system then you shouldn’t override it and as such you should
only get out when a signal is given. However, this book deals mostly with
discretionary systems, which leaves a trader to make a lot of decisions.
Althoughmost everything mentioned above comes down to this basic question.
Ask it out loud. “Should I get out or stay in?” Keep singing the Clash’s
song “Should I stay or should I go?” until it becomes second nature. Ask
yourself, “If I didn’t have this position on would I get in now?” If the answer
is no, you should get out and move on. Don’t waste your time, money,
and energy on positions you do not feel like you would have on if you had a
fresh start. There have been many times where I’ve been married to a position
I knew was wrong, but I couldn’t make myself get out of it. I’d be long
losing money and I knew that if I had no trade on I’d want to be getting
short, because the market looked so bearish. Yet I couldn’t bring myself
to take a loss. Eventually I found that taking a loss is okay, and doing it
will save you lots of money over time. So learn to do it. Now this doesn’t
just apply to losing trades, you could have trades that are winners but are
no longer doing anything. You may want to reevaluate those as well every
night, and if you believe or your strategies tell you it’s done, get out and
move on.
Has Volatility Changed?
As I write this, the volatility in the stock market has recently exploded.
As you can see by looking at the Average True Range (ATR) in Figure 7.4,
the S&Ps range has more than doubled in the last couple of weeks of trading.
The average trading range went from under 12 points a day to well
over 20 for the month of August. You must be aware of this as you trade
because the dynamics of any trade made before this just got different. Targets
and stops may need to be moved further away to make them realistic.
The market may now be too dangerous for you to trade and you may have
to reconsider your strategy. If you had a stop that was to get out after two
consecutive days of negative closes and before you thought you were risking
$2,000 dollars, well that risk may now be $5,000 and you may not be able
to afford it. Likewise, you may have a fixed stop that is about $2,000 away,
but now that can easily be hit by a modest intraday swing, so you’ll get
stopped out when technically you shouldn’t have been. When the volatility
changes dramatically you must reconsider your positions. Even if the
volatility changes to be smaller, you should still reconsider your positions.
You may now want to add to your position or move your targets in to be
more reasonable. Volatility may not have drastic changes often but when it
does, be prepared to alter your strategy and game plan accordingly.
What Was in the News?
Another thing I think traders should look at is why the markets moved like
they did. If you were in a trade that acted out of the ordinary, find out why
it did so. It may not help you much on closed trades, but it’s good to know
if you still have a trade open. Though I don’t like trading off of the news, it
can sometimes change the nature of a trade, and you should be aware of it.
Many news events are blips that will give a market a nice swing, but in the
long run don’t make a difference. But there are some that can be the cause
of a market reversal, like when the Fed cuts rates more than expected, or
a central bank tightens its monetary policy, or a company reports really
bad financial news, or a CEO gets arrested out of the blue for accounting
fraud. If news made something move, even just for the day, it’s good to be
aware of it so you can make a more educated game plan the next day. I
always find trading how a market reacts to news to be a powerful tool, and you can take advantage of it if you incorporate that information into your
game plan.
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