Poor trade management

While traders frequently commit an inordinate amount of time to selecting, planning and executing new positions, they often make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit, after all, that will determine whether a trade has been profitable or not.

This is where the traders’ enemies of hope, fear and greed make an appearance. It is human nature to grasp quickly at profits (due to greed) while the fear of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the desired direction and reduce losses or even see them turn into profitable trades.

There is an old saying among traders that you should, ‘Let your profits run and cut your losses short’. In other words, if you have a profitable position, you should allow that trade to achieve its full potential, rather than closing it out at the first sign of (a small) profit. On the other hand, if you hold a position that is moving against you, you should move quickly to exit that position, before the loss becomes too great.

If you are managing your trades correctly, your average profitable trade should be considerably larger than your average losing trade. Once you have the discipline to trade in this way, you should be able to achieve overall profitability even if only half of your trades are profitable.

Many traders make the mistake of not closing poorly performing positions quickly enough. One tool that makes this easier is the stop-loss order.

Once you have identified a price level that corresponds with the level of risk that you are willing to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human element from the exit, reducing the risk that the emotion of hope will interfere with rational trading decisions.

It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if price trades at or below the nominated stop level. From time to time, this can result in trades being executed at a price that is less favourable than the nominated stop-loss price. This is known as slippage and can arise when prices “gap”.

Many traders make the mistake of not closing poorly performing positions quickly enough. One tool that makes this easier is the stop-loss order.


Source link   Presented by FP Markets

Related Columns

Volume Indicators. On-balance-volume

Volume indicators provide a very different kind of indicator because, instead of relying solely on the price, they take volume into account. Prices tell you in which direction an...

Relative Strength Index

The Relative Strength Index (RSI) is an oscillator that measures a particular financial instrument's current relative strength compared to its own price history. The RSI should not be confused with relative...

Oscillating Indicators - Slow Stochastic

The slow stochastic is an oscillating indicator. Developed by George Lane , it can alert you to a shift of investor sentiment from bullish to bearish or vice versa...

Oscillating Indicators

As their name suggests, oscillating indicators are indicators that move back and forth as prices rise and fall. Oscillating indicators can help you decide how strong a current trend is and warn...


Trending Indicators - Bollinger Bands

Bollinger bands are a trend indicator named after their creator, John Bollinger, and they indicate both the direction and volatility of a share or CFDs price movement...

Technical Indicators and Moving Averages

Technical indicators are based on mathematical equations that produce values that are plotted on charts. For example, a moving average calculates the historic average price of...

Understanding suitability of CFDs

In order for this model to work we need to know three things; our entry price, our exit price & our available capital. The ability to trade CFDs has greatly improved the trading opportunities...

Psychological and Emotional Mistakes

Making money requires a trader to place trades that are ultimately 'correct' and deliver a profit. Because of this, many traders develop the mindset that they must be correct...


Trading for the Wrong Reasons

Most people undertake trading with the goal of making a profit. However, there are some people that participate for entertainment, either consciously or unconsciously. If you are trading...