Follow This Trading Rule, Or Else...
The Dynamic Wealth Report
February 24, 2010
by Justin Bennett, Editor
There are a lot of challenges to successful trading, there’s no doubt
about it. Ask any trading professional and they’ll tell you it took
years of practice to master their craft. This may be a surprise to some.
But here’s what’s really surprising. Even the most astute market
professionals are constantly learning.
Why? Because they have to.
The markets are dynamic and constantly changing. Relying on old
information and strategies can lead to subpar results… or worse. You
have to know which strategies to use in different market conditions.
But there are some rules that never fail...
No matter what the market environment, there are some rules you want to
always adhere to. Rules like cut your losers short and let your winners
run.
And there’s another rule I follow time and time again. I call it the
“rule of sound mind”. Why do I call it that? It’s simple, if you don’t
follow this rule, trading may drive you nuts.
It’s a very simple rule to follow and easy to institute into your
trading.
I’ll get to the rule in a minute, but first let me tell you this…
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Successful trading has a lot to do with trade management. That is, what
you do with a trade once you’re position is established. It’s often the
difference between a profit or a loss. Your results have to do with what
the stock does once you buy it. It could go up, down, or sideways.
As technical traders, we like to enter at a point where we can control
downside risk. We have a reference point if you will. It may be a
support zone, a moving average, or some kind of technical pattern.
If the stock goes against us, we have a point where we’re going to
control losses. If the trade moves in the right direction, it will hit
our profit target and possibly go up even more.
But what if this scenario arises…
You enter a trade off of a technical pattern. It immediately trades in
your favor. You’re showing a profit on the trade. But then the market
reverses before it hits your profit target. Now, your profits are in
question.
Should you keep holding the stock so it can hit your profit target?
Should you exit the trade and take what the market gives you?
The answers to those questions are unique to each trader and their
system. Some prefer to hold to see if the trade will eventually hit the
profit target. Others prefer to sell a portion (or all) of the position
when the market reverses.
There is no right or wrong way to do it. Why? Because the markets are
dynamic. It’s impossible to know exactly what a stock will do next. All
you can do is manage the trade to the best of your ability.
But here’s the “sound mind rule” I believe every technical trader should
follow…
Never let a profitable trade turn into a full loss.
What I mean is this… Once a position has moved in your favor, you should
trail your stops higher to reduce your risk. If the trade moves in your
favor far enough, you should move your stop to breakeven.
In my opinion, you should trail a stop to breakeven every time the
technical pattern you’ve traded has had the intended result. Even if the
trade hasn’t yet hit your profit target…
Allowing a once profitable trade to turn into a full blown loss is very
frustrating. Allowing it to happen over and over will kill your
portfolio and your confidence. (And drive you crazy in the process.)
That’s why I institute the “rule of sound mind” in my trading. Maybe you
should consider it too…
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