Wednesday, January 06, 2010

Trade Management: Key Questions to Ask

Some of the most important decisions a trader makes occur after the position has been entered:

* Do I scale into the trade, out of it, or stand pat?

* Do I hold a trade for the next target or exit when we hit the first target?

These questions of position management reflect whether we gain or lose confidence in our idea as the trade is progressing.

This morning I had a high conviction trade buying ES when I saw that we absorbed the employment news well. As the trade progressed, however, I saw low volume and lack of upside conviction in several indexes and sectors. That reduced my confidence in the idea, so I did not scale into the position. We did not hit price levels that suggested significant weakness to me, so I did not scale out of the position either.

Once we hit the first target, I questioned whether we were seeing enough volume and strength to justify holding for a higher target. That eventually led me to exit in that target area after giving the market a couple of opportunities to break to the upside.

It's not just your confidence in a trade, but whether confidence grows or wanes that determines how you manage the position--and how much money you make.

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10 comments:

cgeorgan said...

Never, never never ever "scale" into a losing trade (which is what I presume the author is referring to).

We buy(sell) something because we think it is going up(down). By "scaling" into a trade, you're making an immediate mistake of acting contrary to what the market has just told you about your trade idea.

The only "scaling" that should be done is increasing the size of trades that are already profitable.

Again: never, ever ever "scale" into a losing trade.

JF Trader said...

Thanks for posting your trading today. It's refreshing to hear your honesty and clarity.
Today, I had a strong feeling to buy the ES at the open. At the time it was at 1130 - sitting at the PP. Well, I decided to watch for a little while instead. Price went up from there and I didn't want to chase , so I watched it. The next three trades were all shorts. I got in on the wrong side and got stopped out each time. After three bad trades, I called it a day. It just seems like the ES has been tough to trade the past two days. In general, because of the volume it feels like we're at a top. My big issue is that I seem to have excellent intuitions that I don't act on and then spend the rest of the day trading against my original idea. I'm ready to go back to my practice of never counter trend trading.
Brett, please keep posting. It's an inspiration.

zircon-212 said...

I'm with you cgeorgan and Paul Tudor Jones who famously said "Losers average losers". We can both sit back and wait for the rebuttals and justifications from traders that 'know' it works. I too know traders that making money averaging losers, but unless you have rock solid discipline and risk management at some point the averagers get taken out of the trading game in a pine box.

Michele said...

Excellent post. This is one aspect of trading that isn't talked about enough.

I do have to disagree somewhat with the comment about never adding to a losing trade though. I think a better answer is "it depends". You clearly don't want to add to a losing position in Enron or Lehman for example.

However, unless you have the extraordinary ability to call the exact bottom every time when you get in, your trade will go against you at some point. If your original reason for buying remains valid, adding to it when it's down lowers your basis, gets you in at a better price, and increases your return when the stock starts to climb again.

Brett Steenbarger, Ph.D. said...

Sorry for the apparent confusion, CGeorgan; I wasn't meaning to suggest scaling into losing trades. The issue is scaling into trades moving toward your targets, which are profit objectives, not stop loss points.

Brett

E-Mini Player said...

"Never, never never ever "scale" into a losing trade (which is what I presume the author is referring to)."

Actually, I believe Dr.Brett is referring to ADDING to a winning position when he says scaling in.

As a general rule, adding to a Losing position is NOT recommended. But, there are times when scaling in even as the position goes a point or two against you is A OK. Look at range days for example. It comes down to managing risk...sometimes adding to a Losing position (within reason) may actually be very little additional risk with a much better reward if the trade works out as planned. I think the Key is: Adding to positions, winning or losing, has to be part of your PLAN.

zircon-212 said...

E-mini ....range days are defined in hindsite unless there is some holygrail of looking into the future I am missing. Or for Michele "the original reason for buying remains valid". The traders graveyard is full of fundamentalists still defending their view and original position point of entry. Nobody....NOBODY can guess the high or low which is defined in hindsite. I bet if a survey was of honest conditions for your worst loss ever averaging a loser had something to do with it. My hand will go up first in the room.

Michele said...

Well I can honestly say that my worst loss ever (in five years of trading) was an NQ contract I bought in December '05. From the instant I bought it, it went down down down. I started kicking myself for not getting out quick. Soon it was too late to get out quick.

I refused to add to this losing position. I gritted my teeth and held on until I couldn't stand it anymore. Finally I capitulated and took a bath. The VERY NEXT DAY, NQ started going up, and kept going up. Had I held on (or added to my position), I would have made a nifty profit in less than a week (start of 2006).

I still think any rule that starts with "Never" is going to be wrong at least some of the time. Refusing to add to a loser amounts to saying you think you can call the bottom. It all depends on your risk appetite, your time frame, and your analytical skills.

E-Mini Player said...

zircon, I agree, there is no holy grail but with some preparation you can anticipate the day type. Check my Blog at http://www.eminiplayer.com for details. Every evening I try to hypothesize and develop scenarios for the following day along with key levels, and it has proven to be very helpful to me.

Arie Blum said...

Thank you for showing your trade Dr!

Can you show us a losing trade as well, and how handle the following trade after that?

At least for me, that seems to be the biggest challenge: "Was I early, or wrong?"

Thanks for all your work and amazing books!