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How to Manage Your Trades Wisely (Most Traders Fail This Essential Skill)

Mark Shawzin
June 18, 2021

I recently received some queries from members about trade management, and I think this is a good way to address a common trading myth or two.
The questions always go something like this:

  •  “How should I manage a trade after I get filled?”
  •  “Do I need to move my stop loss at a certain point?”

Far too many retail traders are much too quick to move their stop loss once the trade is showing some kind of profit.
“You’ll never go broke taking a profit” is the mentality behind this and it’s definitely a big myth.
That’s because yes, you really can go broke taking profits if your losses are bigger than your gains.
Totally obvious, right?
Yet many traders fail to see this. They keep taking small profits the moment they become available (often inadvertently when they move their stops too close and get taken out of a winning trade).
Or they act like a deer in the headlights when they’re in a losing position. They’ll widen their stop (because it will go back to break-even if they wait long enough, right?) and then take an extra-big loss.
Or they’ll leave their stop where it is (much better), take the original loss (fine), yet fiddle with the profit target so they never take the original profit (bad).
Small profits and big losses are how you eventually wipe out your account.
And all this is the net result of trading in a state of fear.
Traders get so worried the market will move against them that they sabotage their trading by making adjustments they shouldn’t be making. They create the losses they were trying to avoid.
So here are some trade management rules to follow:
Leave your original profit target and stop loss in place if the trade is running against you.
A losing trade is just a losing trade, not a crisis. If you’re practising good risk management, no single loss is going to hurt your account very much at all.
I recommend limiting your risk to 1% of your account.
Accept that sometimes trades don’t work. It happens to everyone. Just take the loss and move on to the next opportunity.
Never, ever widen your stop to take a bigger potential loss because you’re “sure” it will turn around.
That’s a very bad habit you should never allow into your trading.
For every time it works, there will be plenty of times when it doesn’t. That’s when you’ll take big -- even huge -- losses. Usually one after the other in quick succession.
Then after the dust settles, you’ll wonder what just happened and how you could have been so stupid to cripple your account like that.
Remember your original stop loss should be placed where it will get hit ONLY if the trade isn’t working out. It’s your “failsafe” to protect you from real trouble.
Don’t disconnect that failsafe or you’ll get really hurt sooner or later.
Don’t move your stop loss (or your profit target) UNLESS you see reversal price action that strongly suggests your trade’s momentum has reversed.
Avoid the temptation to move your stop loss too quickly. Give it room to breathe.
That means not moving your stop loss to break-even (or a marginal profit) at the very first opportunity. Big institutional traders know about this behavior and go “stop hunting” by pushing the market just a bit higher or lower to find those stops. Then you’re out of the market and the trade runs away (often very profitably) without you.
Don’t let them do this. Keep your stop loss safely tucked away where the big sharks can’t reach it with a speculative push up or down.
Only move your stop loss if the price action suggests a significant U-turn is underway. That means waiting for a key reversal or inside bar at a key support or resistance level.
For example, if you’re short a market, you should stay short until your target profit is hit OR you’re no longer bearish on that market. Trend, patterns and price action need to be evaluated the same way both before and after you enter a trade. That way you don’t make emotion-based decisions.
The main idea here is to remain as objective as possible when you look at the market, regardless of whether you have a trade on or not. That’s how you’ll avoid panicking, moving your stop too close to the market, and getting taken out.
Now here’s another question I often receive about trade management:

  • “Do I need to add to my position at a particular time?”

What I just said about moving your stop also applies to adding to an existing position: remain as objective as possible when you look at the market, regardless of whether you have a trade on or not.
Don’t add to a position unless the new setup is as good (or better) than your initial position.
If you had NO position, would you get into the market as it is right now? If not, then don’t add.
It really is that simple.
Be objective about the market, don’t let emotions force you into bad decisions, and always stick to your plan. Limit your risk to 1% on each trade. And don’t change your plan unless you see very compelling evidence the original trade is no longer viable.
I hope that will help you settle your nerves when the market is running with or against you.
Did you find this helpful?
Let me know with a quick comment by replying to this email.
Best regards,
Mark Shawzin