Trading Lessons I Learned the Hard Way, Part 14

08/20/2012 10:00 am EST


Ron Wagner

Principal Partner,

Ron Wagner of Revolutionary Trading discusses the lessons he learned from his early days of trading, and how his trading has evolved to become profitable.

Find the previous article here. Start at the beginning here.

I found trading a great technical pattern in the right market environment was only part of the equation. It was now time for me to focus on improving my trade management.

At first, I used the traditional technical method of putting my stops under a previous pivot, candle, or consolidation. This was fine in a trending market with fairly predictable moves. After a lot of backtesting, I found out that in different market environments I had to manage my trades differently.

This took me a while to figure out because I had accumulated hundreds, and eventually thousands, of trades I could review. Why did I make far more money on some trades and far less on others with the same pattern?

I talked about market timing in a previous part of my journey, but by combining how I managed my trades with the differences in the market environment really made a large difference.

“AON” (All or None) is a common strategy suggesting that if one just leaves their target alone and does not fool with managing the trade they would usually make more money. This might be true if someone were choosing the right trades in the right market environment, but I have found many of these statistical studies are flawed because they don’t relate to an individual’s skill set, how proficient they are in various areas of the market, and certainly do not take into account how the market environment might change.

I became very good at all of the components of trading, but didn’t figure out this important piece until later on in my journey. Most, including myself, come to trading wanting a completely black-and-white approach. Always do this or do that and we should be profitable, right? That’s what I wanted!

I learned to adapt to the market by recognizing that instead of being unwavering in my trade management style, I needed to be firm in how I placed my stop-losses, but flexible in how I managed my trades profitably to conclusion.

I embarked on this part of my journey to find out what best suited my personality. How could I manage my trades to the best of my ability, while not giving back too much on reversals, and also not getting shaken out of a trade that could potentially still move higher? It was not a black-and-white equation, darn it!

Over time, I learned how to read the market environment really well. That way I would know when to “Hold 'em” or when to “Fold 'em,” as Kenny Rogers sang.

Trading is partly mechanical, partly like chess, and even partly like poker. We have to calculate the probabilities of our trade in the current market environment (poker), read the price and volume action in the market and our trades to anticipate what the next market moves and ours will be (chess), and finally have the fortitude to adjust our stop-loss or profitable trailing stops appropriately as we factor all this in (mechanical).

In part 13, I talked about a routine. Part of that routine has now become my set of trade management decisions. Finding a pattern is not very difficult. Knowing how to trade that pattern in different market environments will always be more challenging. It is what makes getting up each morning to trade so fun and productive. Get this part right, and your results will be much better.

I know how to use a profitable trailing stop method for my trades, but it involves reacting to what the market is doing at any given time. I also use candlestick analysis techniques in all of my trade management. The penetration of a previous candle might be where I place a stop for example, depending on how far my trade has moved, what the market environment looks like, and a few other factors.

I have improved my average trade gains by adjusting my trade management based on the market environment and other factors that I follow without fail, and not based on an “AON” strategy.

Sometimes, taking part of my profit off the table halfway to my target is the best strategy. At other times, running a trailing stop and letting the winners run is far more profitable. To do this, I had to become in tune with the market, which has made a very large difference in my results.

I would suggest to anyone that if you hear about a trading strategy that promises a perfect way to manage trades in any market environment, run from it. It will take you longer to work through some of the elements to become a complete trader, but it is so worth it.

Lessons learned:

  1. The market is not the same each day, and therefore we have to adjust our trade management techniques to be in alignment with the market!

  2. Be flexible in your targets but never compromise on where you place your protective stops!

  3. You can move your protective stop loss up, but once moved up, you may never move it down!

  4. Learn to sell incrementally in some market environments, and use trailing stops when appropriate!

  5. Sell some of your position into strength (if long) when you can and not when you have to! It does the soul good to book some profit!

  6. Learn to read price and volume relationship and candle penetrations, as that can help you manage better in sloppy unpredictable market environments!

Next, I will talk about how I found the best way to improve consistently.

Ron Wagner can be found at Revolutionary Trading.

Related Articles on STRATEGIES

Keyword Image
Pensions Have a Problem
04/19/2019 9:24 am EST

U.S. public pension liabilities have increased 64% since 2007, with just a 30% rise in assets....

Keyword Image
Yield Curve Hype
04/04/2019 2:32 pm EST

Despite what you heard, there has not been an official (10-year/two-year Treasury spread) yield curv...