Trade Management

Trade Management - Before, During and After the Trade

Patterns for Profits Newsletter - November 4, 2007

What is trade management? When is the right time to do it? Being able to answer questions like this can put you in a position to not only make successful trades, but to make more of them and with even better results. Whether you are tracking commodity prices or making and analyzing stock charts, you need to be doing the research that makes trade management possible, before during and after you make a trade.

What is Trade Management?

Trade management for the investor is tracking and monitoring of commodity purchases or sales with the purpose of maximizing profits. This can be accomplished by such activities as watching commodity prices, performing technical analysis or following stock charts. The goal of trade management is to identify the right times to buy or sell equities to make the most money possible.

How Do You Do Trade Management?

Trade management allows you to determine how and when to enter into a trade. This is the sum total of your research: following stock charts, monitoring forecast weather patterns for futures or following commodity prices in order to understand if you are buying or selling at the right time.

Watching Stock Charts - Whether you are buying stock or trading index futures, watching stock charts should become a way of life. Stock charts give you an in-depth look at how the shares of a company have been trading and help you to find patterns for futures trades.

Following the News - It doesn’t matter if it is a Wall Street program or a weather channel, finding information relevant to the commodities you want to trade can help with your trade management. Both people and prices are moved by outside factors and the media is a big part of that movement.

Monitoring Commodity Prices - Commodity prices are evaluated in relation to the value of a particular equity. A stock that is undervalued against its commodity price will likely increase in value, while the value of gold may force the commodity price down if it is considered overvalued.

When Should You Do Trade Management?

Trade management should be done in all phases of the cycle: before, during and after making trades. Since investing is an on-going process, it is necessary to make your research on-going as well. Making stock charts, monitoring commodity prices, and performing fundamental analysis on companies is something that can, and should be done at any time in the cycle for each holding you have.

Trade Management Before the Trade - When you are preparing to make a purchase or sale, trade management kicks into high gear. Reviewing stock charts, performing technical analysis or watching commodity prices before you make a trade can be a key part of preparing. It is important to know everything you can about the equity you are buying or selling before you do it.

Trade Management During the Trade - What you do at the time of a trade can be very important. Since we are in the days of triple-digit swings on the Dow, watching stock charts or evaluating commodity prices up to the very moment you make a trade can be very smart. A little extra effort before you push the “buy” or “sell” button can save you from making a trade that suddenly turns unfavorable.

Trade Management After the Trade - Sounds like that is too late, doesn’t it? There is a reason for watching stock charts or commodity prices after a trade. The reason is that you should be doing this on all of your holdings is to both monitor the results you are getting and to prepare for another trade. Remember that commodity prices are always changing and trending; you need to keep your eyes on the commodities or stock charts to know whether you need to make changes.

Wrapping It All Up

Trade management needs to be an all-inclusive concept. Checking commodity or stock charts, following news on FOREX trading or reviewing possible options deals should be a way of life for a successful investor. The best trade management happens before, during and after every trade you make.

Excerpted from the book ‘Essentials of Trading: It’s Not WHAT You Think, It’s HOW You Think'
By Larry Pesavento and Leslie Jouflas

Available at www.traderspress.com

Let’s suppose you have just read your evening email and the pick from your favorite newsletter is your favorite stock, Qualcom. The earnings are going to be announced in three weeks. You can hardly contain your excitement because you remember last quarter when it shot up like the Space Shuttle before earnings, there is no way you are going to miss this gravy train.

You pull up a daily chart of Qualcom and see it has been rising on steadily declining volume, except for today when it closed down by 10 points on 3 times the average volume, your MACD has turned down, and your stochastic has turned down and is crossing down through 50. But you know Qualcom will run huge before the earnings announcement. You check option prices and discover you can buy 3 strike prices out for only 18 points in premium. You are going to jump in first thing in the morning. You hardly sleep.

In the above scenario, the trader has taken the available, neutral information, and distorted it to suit his belief about the future price action of the stock. Distorting information when making trading decisions can trigger emotions that lead to costly errors.

One of the most important skills that a trader can develop is objectivity. Learning to stay in the now moment will help the trader to view the market action as it is unfolding not as they would like it to unfold. This will help the trader to think in probabilities – does this trade have a reasonable edge to profit? If the trade has the criteria the trader can then develop a trading plan including the appropriate amount of risk to take.

Let’s take probabilities into consideration and look at how important it is to understanding trading as nothing more than the likelihood of one thing happening over another. If you can learn to identify your strategy with probabilities you will no longer need to base it on anything else and there will never be a trade that you have to be in.

There are no traders who trade with the right side of the chart filled in. So what do the good traders know or do that you don’t? Why does it seem so effortless? I’ll sidetrack here to illustrate this point.

Several years ago, I was bitten by the ‘ski-bug’ I was bound and determined to ski like the smooth and effortless skiers I would watch in awe of as I rode up the chair lift.

It was my good fortune to have signed up for lessons with Brian, who I can only describe as a “ski god”.

During our first lesson, we were going down a very gentle slope; Brian asked me what my goals were for that year. At the very moment he asked and I started to answer, my ski tips crossed which in effect tripped me and sent me into a head over heels fall on my back. As I was sliding down the hill, in a sort of Yoga twisted position, Brian was gracefully following me down the hill. I told him, as I was sliding down the hill, that I seemed to have a problem with my ski tips crossing and I didn’t know why but I would like to work on it. As I came to a stop next to a tree Brian just said, “I think we can fix that.”

The next year, I was riding up the chair lift with Brian; I asked him how his skiing became so fluid and consistent. This man glides down mogul runs and is never out of breath. He is solid and graceful on his skis. He skis all terrain the same, ice, moguls, crud, powder, mixed, it doesn’t matter. His reply? “Once I took out of my skiing what didn’t work and replaced it with what did work I realized there are no bad snow days, just bad skiers.”

Skiing is very technical, much like a technical approach to trading. You learn in steps, or progressions. If you fall you can analyze the cause and then add or remove something to change the outcome the next time. Sometimes on days when I see a lot of skiers turning in their tickets because “you can’t ski on that stuff” I smile to myself and head for the lift. There are no bad snow days!

Now back to trading…

You want to identify at what point you will enter a trade that will give you an edge. At what point will there be a higher probability of one thing happening over another? Not a guarantee, but a higher than 50% chance of that outcome. There are some very good traders that have a strategy that is below 50% and still make consistent profits. By taking the time to study a strategy so that you know it and have a high confidence level in it, you will greatly increase your trading successes.

One of your goals should be to fine-tune your trading skills so that you are able to take in and look at available information objectively. This takes time, patience and practice. You will make mistakes and sometimes overlook the most obvious things. When this happens, go easy on yourself and correct what needs to be corrected the best you can. If you need to sell, then sell. If you missed an entry point, don’t chase it. You can wait for another entry or find another trade. Start to take note of when you feel you have ‘distorted’ the information. If you keep track you will be able to spot it sooner and take the appropriate actions.

When you distort the information, you are trying to get the price to conform to your expectations, rather than evaluating what the most likely direction of price is in “X” time period? If you can start to be objective you can then view the charts that come along in categories:

Those that are ready to buy.
Those that are ready to sell.
Those that do not give enough information to determine a reasonable probability. In a nutshell, buy, hold or sell.

Once this process starts, you will no longer find blame with anybody or thing but yourself. Except, when you take a loss you will no longer blame yourself, but congratulate yourself for doing what is necessary to become a successful and consistent trader. You will then be on the right path. You will start to see that your ‘thinking’ can actually interfere with your process. I don’t mean that you should take thinking out of trading, I mean when you ‘think’ you know what prices will do you start a mental process that can lock you into that thought and everything you take in will be distorted to fit that opinion.

If you study charts, you’ll begin to realize that every chart will offer an opportunity to profit. Prices do not stay in one place. Keep this in mind when you find yourself focusing on one trade that isn’t going well. I call this tunnel vision. You get so wound up about one trade that you don’t see a dozen other good trades going by.

If you use a newsletter service to help pick your trades it is a good idea to never take any ‘picks’ on blind faith. In other words, you don’t quite have a strategy so you attempt to use theirs. Remember that they know the method they use like the back of their hand. They are not trading based on one trade. They trade based on many trades and know that some work, some don’t. If you pick just one trade out of the many available, your odds of success decrease dramatically. You need to do a series of trades using the same strategy to really evaluate the success. Many strategies are suited for some types of markets and perform well under certain conditions. You need to know what those are. If you happen to start trading a strategy during market conditions that are not likely to give good results for a period but would normally outperform in other types of market conditions, you need to be aware of this. It would be very easy to pass by a very good trading system because of this.

A series of trades, say100, based on one strategy may produce some great winners, some good winners, some scratched trades and some losers, not necessarily in that order. Out of those trades, nobody knows which ones will be which! Now, hopefully you are starting to see that we are talking about probabilities. Not hoping or wishing. You should be able to answer if the system you use has a high probability of one thing happening over another. Should I be in this trade or out? If I am in the trade then why am I in the trade. There should only be one answer- the probabilities of success are on your side.
This is very important to understand so that you know when your system is likely to perform well and when you might want to sit it out.

Losses are inevitable in trading. Go back to the 100-trade scenario; do you or anybody know which of those trades will be the great winners, the losers, the breakevens or the average gainer? If you know that, you don’t need a system.

Whatever style of trading you choose you must develop a high confidence level in it to be able to assess the probabilities and execute the trades properly. If you do this you will start to eliminate many of the mental problems and stresses that come with trading.

Remember, we all started on the Bunny hill. But with time, hard work, good teachers and mentors you can make it to the tougher slopes!

Patterns for Profits Trading Tips

A few mental triggers that can cause a trader to distort neutral and unbiased information:

A previous trade with a stock that was successful.
Following someone else’s advice or opinion that is contrary to your own.
Feelings like you ‘need’ to make a successful trade.
Feeling like everyone, except you, is making a lot of money and picking the ‘right’ trades.
Not having a thorough understanding of the strategy you are using.
A previous trade with a stock that was a loser.
Believing you know what the price will do.
Not believing the price.

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Leslie Jouflas
Kelly Hill