Letting Winning Trades Run – Trading Your Plan
It’s one thing planning on having a specific target or risk reward prior to entering a trade, but another thing altogether to see this trade idea through to fruition. The problem is that our thought process can be distorted after entering a trade as we become more heavily involved, both from a financial and psychological perspective.
Do you find yourself closing trades to remove yourself from an uncomfortable state of mind associated with open positions or purely to align with your trade management criteria?
Why is it often so difficult for traders to let profits run?
External factors may appear to be the initial trigger for these troublesome emotions, with visions of unrealised profits turning into losses or similar situations, but in many cases your thought process is the real cause. Stress and tension can be minimised, irrespective of external conditions, if the necessary planning and preparation has been taken care of before the trade entry is in place. Self-confidence ultimately comes from developing a methodology that you will believe in no matter what happens with one single trade.
One thing to make clear is that you must have a proven edge or the following is of no use. Trading psychology can not replace a profitable methodology.
Lets look a a few key points which can be helpful when looking to let winning trades run:
- Have you planned your trade idea well before the entry? With the necessary research, due diligence and analysis? Make sure you are satisfied that the trade idea is sound before executing. I recall Linda Bradford Raschke, in the New market Wizards book, saying she would wait for things set up “just right” prior to taking a trade and then count to ten slowly, before calling in her order. Successful traders like Bradford Raschke are not afraid of missing any market moves; as they know that other opportunities will arise.
- Do you have a well thought out profit target or exit plan in place? It is often better to make this decision before the trade, so as to minimise the affect of emotions taking over after the trade entry. Some traders may be able to “finesse” their exits and think on the fly, but if you have a history of sub-optimal exit decisions, a pre-determined exit strategy may make sense. You should consolidate all aspects of your trading exit method into concise components and this is captured in your trading rules document.
- Cut your trade size. If you have anunconfortable feeling when trading you may actually be trading with too much size.
- Consider using a non- discretionary exit strategy. Some traders choose to utilise a trailing stop loss exit strategy, or similar, in order to remove the human element from trade exits as they are more comfortable attempting to predict price direction than the associated potential magnitude of a move. If this seems appealing it is important that you test this approach beforehand, in order to ensure it fits with your methodology and provides a positive expectancy.
- Affirm and strengthen any constructive thoughts, behaviours and emotions in order to minimise self induced stress after entering a trade. Remind yourself about the testing that has gone into your trade strategy. Think of the strategy as a whole with an associated edge and not a single trade in isolation. Aim to build positive feedback loops as the way we respond to stimuli encountered on a day to day basis is directly in accordance with our individual mindset. Affirmations can be used similar to this ““After I enter a trade, I will not interfere or edit this trade, thus removing emotions from the process and trusting my initial observations”. Your affirmation should resonate with you as an individual, so make sure it captures you true thoughts.
The process of letting profitable trades run is often counter-intuitive for many people, as it is difficult to see unrealised gains disappear as the market fluctuates. Impatient investors, who violate their exit rules on a regular basis, could be heading down a dark road; this can lead to significant losses if their win/loss ratio is not good enough and they constantly close trades early. Trading psychology is heavily reliant on having a profitable methodology – the more a trader has tested and seen that a system has been been successful, the more they may be willing to place trust in this system, and be able to follow the respective signals.