- Posted by TopStepTrader
- on January 24th, 2012
The following Guest Post submission is from Gregg Killpack, a trader in the TopStepTrader program. For more on their innovative program to cultivate and fund aspiring new traders, check them out at www.topsteptrader.com.
Position management involves the decisions you make after you enter a trade. The main
question is: When to sell? On the surface it sounds simple, but anyone with trading experience
knows it can be a very difficult question. You need a plan to follow before the heat of the
Once you are in a trade, only one of three outcomes can be the result:
1. Sell for a profit
2. Sell for a loss
3. The trade just sits there
A major theme for trading is that we always want to have two potential spots to exit in place: the
profit target and the stop. No matter what your strategy is, you should have an idea what your
risk is compared to the reward you are attempting to capture. Except for scalpers, traders want
the biggest possible reward possible for the risk they take. The very least the ratio should be
is 2:1 / reward-to-risk, but I want 10:1 if I can get it. This very often forces me to improve my
entry points until it meets good risk-to-reward parameters or not place the trade at all.
As traders, of course we always want option #1 – to make money. The real issue here is how to
maximize the profit. The answer depends on your trading strategy. In many ways, managing a
successful trade is the hardest because inevitably traders hold on too long or not long enough.
The answer is easy for Scalpers, who seek income by taking a quick profit with tight risk
parameters. They are more likely to place lots of trades with the risk being about the same or a
little less than the potential reward. They aren’t holding trades for long anyway, so entry points
with an edge tend to be a more important issue for them and to have as low commissions as
possible. To be profitable, scalpers generally have to have a much higher percentage of winners
vs. losers in order to profit if they are risking about the same as the reward. Managing the
position is mostly a mute point – they either get stopped out or hit the target and quickly exit.
Intra-day trend followers are trying to ride the trend as far as possible before it reverses in order
to maximize profits. They should not try to guess where the top is and sell. True trend followers
should let the market tell them when the trend is over in order to catch as much of the trend as
possible. They should not play the position so tightly with a trailing stop or they could see a
profit of 20 ticks when they could have made 50 or 100.
The other option is to sell when the profit target is hit, which can still be a profitable strategy;
you will miss the big moves at times but other times you will hold on to your profits before the
market reverses on you.
As an intra-day trend follower, after entering the trade I already know where my stop and target
are. If the position goes some distance toward my target, I won’t take a loss and will move my
stop up to break-even. Once the position goes a significant distance in my direction, I won’t give
back more than 50% of my profit. After working hard to gain a profit, I just hate giving it all
back. I would rather lock in my profits and decide later if I want to re-enter a trade.
Option #2, selling for a loss, is a necessary evil that comes with trading. As long as your reward-
to-risk ratio is properly in place, a trader can have an equal number of winners and losers and
still profit. The stop should give “wiggle room” for the position to move before heading in the
right direction. How much that room should be depends on the volatility of the security you
trade. This is where knowing how your security moves based on studying charts proves helpful.
Don’t rationalize, don’t feel bad – just take the loss and move on to the next trade.
As a day trader, I don’t mind option #3 although it bores me to death when my position just sits
there. As long as it does not move against me, I will stay in the position with stops in place, or
get out before the close, and look for other markets to trade that are moving. For longer-term
traders, don’t let your position waste too much of your time when you can be making money
with something else.
One of the best things a trader can do to improve is to know his/her tendencies, to analyze them,
and decide what actions will receive the best outcomes for his/her trading style.
Many Profitable Returns,
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
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