By David Adams
Once you have entered an e-mini trade a new set of concerns becomes the trader’s prime concern. Trade management is just one of the skills in which a trader must become proficient. As every trader is aware, he or she wants the price action to move in the direction they have chosen. But how far do you let it go? How do you maximize the return on your trade? What do many traders do to sabotage their trade management success?
While there are many concerns regarding trade management, I have chosen four rules which I think are among the most important to observe.
Rule number 1 – Never Trade without Stops in Place
Before a trader decides to initiate an e-mini trade, it is important to assess the level of risk that he or she is willing to accept. That level of risk can be quantified by setting well thought out stop loss orders. There are a number of ways to decide how much you much you are willing to risk, or is prudent to risk, when considering your stop loss order. One of the most common methods is to use the Average True Range to get an idea about potential time period movement and set your stops accordingly. Obviously, if the market is extremely volatile, say the Average True Range is approaching 10 ticks; it would not be wise to set a stop loss of 10 ticks as you could be easily stopped out in a single bar. Whatever the methodology you decide to use to set your stop loss limit, be sure to always assess your own risk level and never trade without a stop loss limit
Rule number 2 – Never Expand Your Stop Loss Order to Accommodate a Losing Trade
If there is one mistake that I see repeated over and over, its e-mini traders moving their stop loss orders to higher levels on a losing trade. I understand the thinking behind this action, no one wants to take a loss, and by making your stop loss order wider the market may reverse course and put you on the winning side of your trade. Unfortunately, this is seldom the case. Usually expanding your stop loss limit results in a larger loss, not salvaging the trade. After all, your trade is already doing very poorly and it is unlikely to change direction to accommodate your loss. Moving your stop loss nearly always increases your total loss. It is far better to let the trade run its course, or even exit the trade early if you see it is clearly going against you.
Rule number 3 – Never Double down on a Losing Trade
This is another tragic e-mini trade management mistake that I often see new traders initiate. The criteria for doubling down in my trade management philosophy is simple; I never double down a losing trade. If a trade is already going bad there is little reason to make it twice as bad. Yet it is not uncommon to see individuals adding to losing positions to lower their breakeven position and hope that the trade turns in their direction. Hope is not a profitable trading style, and trading on hold alone is an expensive proposition. In short, stick with your original number of contracts and let the trade play out.
Rule number 4 – Never Let a Winning Trade and Become a Losing Trade
I need to quantify this a bit before I explain my criterion, because it is not uncommon for a trade to get a few ticks to the positive side and then reverse direction; this is not the type of winning trade I am going to discuss in this section. However, once my trade has reached 6 ticks in profit I generally move my stop loss to breakeven. Why? Once I am in the money I want to stay in the money, and if the trade begins to move against my position I know that the worst I can do is break even. This is one of the few times it is wise to move your stop loss. But in moving your stop loss you are lowering your risk not increasing your risk. Once you are in the money, stay in the money.
In summary, we have looked at for rules that will help new and struggling traders improve their bottom line profit. It’s important to observe these rules at all times; there are no exceptions. Learning to be a disciplined trader at the trade management level is essential to becoming a successful trader.
About the Author
Real Live Trading Doesn’t Lie. Spend several days in my trading room and see if you can benefit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here
