In this post, let’s find out if your management style is making you, or losing you money. To do this, let me ask you one simple question:
Are your trade management rules clearly defined in your trading plan?
A complete trading plan should consist of rules for entries, management, and exits of trading positions. It is a natural trait to put more emphasis on the entries when learning a new strategy, this seems to be the most important aspect of a trade. This is only partly true, management and exits are just as important and determine the final result of a trade.
The most important part is to have your management rules written out in your trading plan as clearly as possible. Your trading plan should state precisely what you need to do when a certain situation presents itself. Your decisions on how to manage a trade will eventually decide whether the trade is a winner or a loser.
You’ve probably heard of the saying “let your winners run and cut your losers short”. Interestingly enough, this saying only makes sense if you have actual data to back this up. When you back-test a strategy, including its management style, you collect data on the performance of the strategy. It would be best if you based your management style on how it performs during the backtest, over a large sample size. There is no such thing as a “one style fits all” because it completely depends on the trade idea. If your backtest shows you that moving your stop loss to breakeven after running 1R profit yields the best results, you put this in your trading plan.
The general idea is to base all your decisions on data, not gut feelings or emotions. Ignoring the data is what is causing traders to cut their winners short and let their losers run.
Speak to you soon!