Due to the effects of indexing, stronger emerging market economies, particularly in Asia, will be ca...
Trading Lesson: Managing Your Winners
11/07/2017 3:16 am EST
The tools I’ve outlined for you here are designed not just to make money, but to relieve the stress and anxiety that accompany trading, according to CBOT veteran Jeff Wecker. Look for more Trading Lessons every Friday on MoneyShow.com.
Before you can manage a winner, you’ve got to get into it. And you’ve got to get into it with minimum risk.
Because in the end, it’s all about risk/reward followed by money/trade management.
If you try, for example to enter a currency trade with 30-50-100 pips of risk, you are going to have to be right quite often.
If you can find flash points in the market, where you can enter with 5-15 pips of risk, you probably only have to be right one out five, six or seven times to make consistent money.
So, spend some time looking for those inflection points in the market.
Once you’re in, your stop has to be moved to break even. Never let a winner turn into a loser. Never let a trade turn into an investment just because you are stuck.
It’s also a good idea to take partial profits quickly. That way you are playing with the market’s money and you can forget about that trade and move onto the next one.
There’s a lot of psychology here: if you’ve already taken partial profits and your stop on the balance is at break even, you have no excuse for not staying in the trade. Many traders have a problem with holding losers and getting rid of winners quickly. The style I’ve described will help you do the opposite.
So now you are in the trade, you’ve taken partial profits, and put a stop at break even on the part you are holding.
What’s next? Well there’s always a technical measurement that will give you an idea of where you are going. It could be a head and shoulders formation, an Elliott Wave Analysis, a Fibonacci retracement or one of several other measurements.
The point is that one or a combination of these technical measurements will yield an objective.
Once you know the objective, you’ve got to make up your mind to stay in the trade until the objective is reached. Some people think they can trade it by selling on rallies and try buying it back lower. Not a good idea. It’s very hard to jump on a moving train. And what usually happens is that the trader sells it on a rally and overnight it gaps up and the trader is lost. And worse, the trader has no way to get back in.
If he bought it after it has gapped up, it will usually drop back and fill the gap, and guess what? The trader has turned a winner into a loser.
So, when do you sell? As soon as it reaches its objective?
No. Why? Because in most cases, the market overdoes it. And usually if you get out at the objective, you leave a lot of money on the table as it continues up without you.
I remember a specific trade when I was long GBP/JPY and it reached its objective which was a nice 400 pip win for me. So, I took my profits and got out.
Guess what? It proceeded to go up another 300 pips with me watching. So, the lesson is, “don’t take yourself out of the market, let the market do it.” After all, the market is always right, not you, not your opinion and not someone else’s opinion.
Consequently, my strategy when my objective is reached is not to get out but put a trailing stop in at that point, not before. And let the market take me out.
In summary, there’s little doubt trading is 10% technical and 90% psychological. After all everyone knows the technical aspects of trading, and they are useful, but the adage is that what everyone knows is not worth knowing.
The tools I’ve outlined for you above are designed not just to make money, but to relieve the stress and anxiety that accompany trading.
Let your losers go quickly and hang onto your winners. Enjoy!
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