In this 4-part series (concluding next Friday), Ben Reynolds, CEO and editor of Sure Dividend, highl...
How to Handle a Trade Gone Bad
11/19/2012 1:16 pm EST
You're in a trade and it's not working. When do you admit you're wrong? A lot of people struggle with admitting they're wrong. When do you throw in the towel? It depends.
Anne-Marie Baiynd says I'm a very structured trader. So I trade what I see and not what I think, for the most part—except when somebody else shows up that looks like me, but doesn't really trade like me at all. That happens some days!
But what I do when I get into a trade, the first things that I actually begin to look for is not, “Hey, is this trade going for me?” but “Hey, could this trade be showing signs that it’s going to go against me?”
So I'm immediately waiting for signals that say this is not going well because I used just two indicators. Let's say I'm going along, I'm at a Fib level, and I wait for the moving averages to cradle that Fib level so the price is on top. If the price dips below that Fib and then falls below my moving averages, I am wrong and I must get out.
Now I might be right 30 minutes later when the set-up comes again, and I must be disciplined enough to take the set-up instead of remembering I was wrong the last time. Because you can't have a systematic and consistent trading experience if you are only thinking about, “Oh, well, that last time it didn't work out.” You must get back and trade what you see because what you see is what's going to work if you've got a good system.
So at the first sign that I am wrong, I will get out and I'll look for the next time that I can get in, maybe at a better price, maybe I'll lose a few pennies, whatever it is. That'll be the focus of how it is I'm looking for that trade.
I didn't used to be like that. I used to have a little bit more of an investor mindset that says, “Alright, well, it's pulling back, the selling is overdone.” That's not good. Not good for trading. No, not good for day trading at all. A day trader must keep their trading tight. They must be tight. They can't sit around and go, “Hmm, I wonder what I need to do here?”
What about the once-burned, twice-shy mentality where you got faked out by the set-up and then you see it come again. Are you going to put good money after bad? That's the first question that you ask yourself. It really, really is.
You go, “Wow, is that going to fail on me again?” But sometimes what happens is the rest of the chart will tell you whether that breakout is going to fail or it's going to turn around.
Maybe by then the Bollinger Bands are moving. Maybe by then the moving averages are farther apart because if a lower moving average begins to accelerate away from faster moving average or the faster moving average is accelerating from the slower moving average, it means that momentum is increasing. So if that happens again, then you're in better shape than you were the last time.
So it's always, as a trader, all day long, all you're doing is making decisions. Your ability to make good decisions is going to be the reason whether you end up a good trader or a bad trader. That's really as simple as it is: Step one, step two, step three, that doesn't look right, you don't take it.
A lot of times we have that second set-up, it's ready to go, and we don't take it because we think about what's passed us. Like the game of golf, you cannot remember that last swing or else you're going to have a terrible day on the course.
About your moving averages—do you use simple or do you use exponential? I use the exponential for the eight, but I use the simple 20 and the simple 50. I'll look at the 200, but I don't want the chart to end up looking like a train wreck if I'm showing it to someone. I try to make it as simplistic as possible.
Related Articles on STRATEGIES
The “Dogs of the Dow” is one of the simplest, most well-known dividend strategies on Wal...
A favorite strategy of mine is to buy Dow “Underdogs,” the stocks in the Dow Jones Indus...
In this 4-part series (featured each Friday in February), Ben Reynolds, CEO and editor of Sure Divid...