Five Reasons To Step Away From A Trade
04/17/2008 12:00 am EST
Volatile markets can send your positions into the negative. Indeed, bad trades frequently happen to good traders. Regardless if you are a scalper or momentum trader, the most important part to any strategy is knowing when to intelligently and rationally walk away from a trade.
1. No Support or Resistance in Sight: Technical analysis is the backbone of day trading. Day traders use technical analysis to find support and resistance levels to determine where the price will go next. Most day trading strategies are built on support and resistance, with some heed paid to news events over the course of the day. When holding a position deep in the red, or if you are contemplating taking a position, look at the chart for support and resistance lines. In an area with no support, it is likely that the stock could go in any direction.
2. Momentum is Against You: With a quick breakout out of an uptrend, you suddenly find that the market is moving against you. Upward gaps symbolize that the position has legs and will keep running. Momentum strategies usually send day traders and swing traders alike to place heavy bets in their momentum calls. Once a trend is established, traders from all around the world jump on and push the market further, meaning your trade runs further from your profitability. When the market gaps away from you, get out of the trade.
3. Low Reward: Trading success is dependent on producing returns and minimizing risk. When support and resistance levels are both within sight, it is generally not a good idea to make the trade. The marginal benefit from a support bump is not worth the risk of a trend breakdown. Create your own risk and money management criteria to determine when the time is right to make a trade.
4. Topping Out: Tops are difficult to call until they are over. Understanding candlesticks and candlestick chart patterns can make calling a top a much easier task. In a market top with significant support, the price could drop dramatically or go into a sideways trend. A sideways trend is a dangerous market because the ups and downs eventually breakdown to send the price in one direction, giving you a 50/50 probability of profitability.
5. Late in the Day: Late day breakouts can be profitable, but holding a position overnight can ruin your trading capital by market open. Swing traders might be able to weather the market open, but highly leveraged day traders should avoid late-in-the-day positions. Most trading strategies avoid late-in-the-day trades to cut interest costs and limit exposure to volatile market opens. In day trading, it is always best to start your trading day anew, limiting your risk to any overnight or pre-opening bell surprises.
The most successful traders know how to read strong trades, but equally as important, they also know exactly when to cut their losses or lock in their gains. Developing your trading acumen means trading your exit strategies and analysis.
About the Author:
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide