Get Serious About Trade Management

07/15/2011 3:30 pm EST


Robb Reinhold

Principal, Maverick Trading

Trader Robb Reinhold stresses the importance of diversification and recommends "trading in baskets," which uses multiple small positions to mitigate risk and actively manage trades.

Finding a good trade might be important, but trade management is equally important, if not more important, according to Robb Reinhold. He’s with Maverick Tradings, here to talk about that today.

So Rob, why is trade management such an important part of trading?

Trade management, in our opinion, is the only thing that matters. Of course, we believe in doing your due diligence on a trade and getting in at the right time, but when it comes right down to it, what you do with your trade is by far more important than how you get in.

Just to break that down to what it means, cutting your losers and letting your winners run. It’s one of these things that everyone knows they should do. Everyone understands, but actually putting it into practice is a difficult thing.

Alright, you talk about “trading in baskets” too, which is different than what most retail traders do. What does that mean?

Yeah, that’s a great question. “Trading in baskets” is where you take multiple positions across multiple asset classes. And when you look at that entire trade, there might be 15 or 20 trades you’re doing, but in all reality, it’s one trade.

What this does is it cuts down any single-stock risk of a bad event happening against you.

What most retail amateur traders do is they will take one or two trades in their account at one time, and how well those do will greatly dictate their success during that period of time.

So if they make money on both of them, they will see a large swing higher in their accounts and they’ll think “Hey, I’m great.”

If they make money on one, lose money on one, they might stay break even. If they lose money on both, they see a big dip down in their account. And that’s it; their success rests on those two.

We all know that you can sometimes call the market right, call the sector right, and your stock doesn’t react. If you have just one or two positions, you’re going to miss out.

So, do you recommend automating the buy portion of this basket or just manually going into each trade individually?

Again, each trade is a part of the basket, so each trade needs to be treated like it is an individual trade.

Everything needs to be done. It needs to be charted, you need to plot out risk/reward, you need to plot out entry and exits. Everything needs to be planned out like it’s an individual trade.

The only difference is it’s going to be one of 15, and because you’re doing 15 instead of just one or two, each position is going to be much, much smaller.

Do you recommend going across a certain variety of sectors to diversify that way?

Absolutely, and not only across different sectors, but also different outlooks.

If you take a couple long positions, we think you should hedge yourself out with a couple short positions. We do a lot of options trading, so we do a lot of sideways, we do some bullish, some bearish, and we try to make our entire portfolio to where there is very little market exposure by going what you call “Delta neutral.”

That way if the market goes up, down, or sideways, you’ve got positions that are working for you (and some that are working against you). But if you look at it all as one trade, the big question is, at the end of the month, did you make your profit?

If you position yourself correctly, you’ll be great. There’s not going to be one stock in there that’s going to ruin you. Even if one gaps down substantially—has some adverse news—it’s a very, very small portion of the trade. And if the market moves down, you’ve got some bearish stuff that works for you to hedge it up.

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