Do This Before Placing Your Trade

I have talked about this before and I am going to talk about it briefly again because it bears repeating. Know what you will do no matter what happens before you enter a trade. It sounds like a simple thing to do, but you would be surprised how many traders are so excited about the entry, they hardly think about the management of the trade.

Let’s say you see a stock breaking over a resistance level and you think it can continue to move higher. A bull call spread is selected as your choice to try to capture a profit. Before you enter the trade, there are several things to think about. When are you going to take a profit and a loss? Should you use multiple exits for profit or loss? Will you use hard or mental stops? What if your stops or targets are exceeded? There are several different scenarios that can play out and you need to be ready for any of them, and sometimes several of them, to come to fruition.

For the bull call spread example above, a trader can consider taking a 25% to 50% profit on some contracts, then moving the stop loss up to break even and next going for a bigger target. At the same time, he or she can risk with a stop loss (hard or mental) 25% of the cost of the trade or close out some positions if the stock closes back below the new support level. If the target or stop loss is exceeded because of a gap, close out the whole position.

That is just one example to think about when managing a trade. To me, it is imperative you think about it before you enter the trade so that the emotional trader does not make decisions once the position is on. Good luck!

John Kmiecik, Market Taker Mentoring

Trader Education