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Should we try to save and limit the damage of a trade that’s gone bad, or just accept it and move on?

Apr 25 • Between the lines • 1508 Views • No Comments

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shutterstock_85805626No matter how perfect we believe our trading method is, no matter how solid our overall trading strategy is and no matter how complete we believe our trading plan is all traders (will at times) get caught in trades that simply ‘go bad’ despite us following our trading plan and executing our trading strategy to the letter.

The trades may go bad immediately upon entry; never moving into profit and simply reversing trend immediately, or we may experience a form of technical glitch. We may receive a signal to enter as a major high impact news event breaks but be caught out as the security spikes to then retrace. In short there are a multitude of reasons why a potentially good trade, a trade executed as per our trading plan, can go bad.

In this article we’re going to look at what control measures we can put in place to protect ourselves from trades going bad and if there are any damage limitation measures we can apply to our trading strategy beyond the blunt instruments of stop losses that could help us limit the damage to our trading accounts.

We don’t need to think about “saving” bad trades, the best we can do is to open and close trades

Although it is on the face of it a very simple statement there is a lot of truth and sense in this one liner. Trades should be opened and closed as per our trading plan, no trades should be executed outside of that plan. The best we can do is to open and close trades as part of that plan and thereafter we are quite simply at the mercy of the market over which we have no control. We can only affect change on those items of trading we can control.

We should only take trades that we have 100% confidence in when we pull the trigger

Although we only take trades that are 100% compliant with our plan and as such trades that we have 100% faith in, there will always be trades that we find ourselves in that we wish we hadn’t taken. We can never take trades that are absolutely 100% probable or certain. Therefore, we’re going to enter trades that we wish we never had at certain points in our trading career. When we click on that order confirmation, we’ve done all we can to tilt risk in our favour with the highest probability. If we’re not convinced that we’ve done this, then we should not click the order confirmation.

Immediately examining why the trade is going against you

Let’s put ourselves in a live situation; we’re currently long the Aussie having entered early April, around April 4th. However, having watched the trade go into significant profit, circa 100 pips, looking at the price action today, having read all the recent fundamental analysis and witnessed our profit now evaporate, we’re considering whether or not to stop our trade and consider reversing our trade direction. But the real issue is twofold; our signals to stop our trade have not triggered and we haven’t received any signal to take a short trade. We’re currently ‘stuck’ in no man’s land, the trade is now underwater, but hasn’t reached our stop level and none of the indicators we rely on for trade execution have triggered. This is when our discretionary trading skills rise to the top. Do we close early and take the loss, hope the trade turns around and stick with it, or simply wait for our signal to close arrive?

Trading in no man’s land

We mentioned earlier the phrase “no man’s land” in relation to trading, what we mean by this is twofold. Either operating outside of our trading plan and taking trades that don’t fit in with our criteria laid down in the plan, or finding ourselves ‘mid trade’ and in doubt as to whether or not we should use our discretion by interrupting the trade manually. So is the answer to our Aussie trade conundrum (that we’re currently doubting) as it’s now in negative territory to not get caught in no man’s land? Yes is the short answer. We either use our indicator based trading system to close the trade ruthlessly and without hesitation and wait for our signal to short the security, or we interfere manually without hesitation, what we don’t do is move our stops, trailing or otherwise, on a hunch that the trade will ‘come back’ our way.

Know our risk before we enter

All outcomes of any trade should be mapped out before the trade is taken. We don’t know what is going to happen, but we should know what we are going to do within our range of possible outcomes. It’s not necessary to “save” anything we just do what we have planned on doing. A good trade is the one that based on rules of our method and a bad trade is the one we took breaking our rules in a rush of blood. In some ways the outcome of both trades is irrelevant regarding the fact if they are good or bad.

The only bad trade that exists is one that goes against your rules

It’s a fact that trades sometimes don’t work out, therefore we simply close the trade and move on. If we entered the trade based on our rules it was a good trade. The market does what it wants to do irrespective of our trade. We find a set of rules that produces a positive expectancy and we trade it, we don’t get steam rollered over a trade that didn’t work out.

Not every trade ends up as winner. And not every winner is a good trade and not every losing trade is a bad trade. We can’t make money on every trade. Don’t try to avoid losing trades. Create rules and then stick to them. It is the only way to succeed in this business.

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