Manage the Trade
Once you get into a trade, you must eventually get out. Some argue that this is more important than where you get into a trade. My experience has been that any fool can get into the market, but it takes a successful trader to consistently get out with a win. As I follow the markets, I find there are four reasons to get out of a trade.
Prices move significantly against my position.
Prices stop moving in the direction of my trade for a time long enough to say, “Enough! Let’s take the money off the table and run.”
I have reached my objective number of points, ticks, or pips and my plan calls for me to exit NOW!
I am no longer comfortable with the trade and I am exiting NOW—win or lose.
To manage the first condition, a market moving back against my position, I find it is a good idea to use a stop order. In fact I would say trading without a stop is like walking a tight rope without a net. You should always place a stop, not because you expect the market to go against you, but to protect against the unexpected. The worst losses I've seen have resulted from a trader not having a stop order in place and the ensuing deer-in-the-headlights paralysis that sets in once losses start to mount.
If you are fortunate enough to get into a market that moves in the direction of your trade, it is also important to move your stop with the market to eventually protect some profits. In that case you are getting out when prices hit your trailing stop.
To manage the second condition, where the market stalls for a time, I use a time stop. All my plans call for the use of a time stop. A money, points, percentage, or number of ticks or pips stop is a money management stop. A time stop is a trade management stop. I am a momentum trader whether I am scalping, trading a swing, or trading the trend. I am looking to make my money from price movement. If I am wrong about movement, then I am just as wrong as if I were wrong about direction. My timing is not right if the market does not move. So I get out.
To manage the third condition takes great discipline. I have to learn to be satisfied with what I can get a very high percentage of the time. That is always my first objective. I want to be paid to trade. I want at the very least to have had a free trade. Therefore, I trade with at least one fixed objective (money management) and a trailing stop (trade management) in addition to a time stop.
To manage the fourth condition I have learned to go with my feelings. If I become uncomfortable beyond what is normal for me I allow my instincts for flight to take over and I get out—I do it as quickly as possible. I am not out to prove to anyone how much pain I can withstand. Trading in pain has always caused me to make serious mistakes. I prefer to make the mistake of losing out on what may turn out to have been a winning trade. Thankfully my instincts have turned out to be right far more times than they’ve been wrong. I’m usually glad I got out when I did from an uncomfortable trade.