The Art of Managing a Trading Position #59
Market Meditations | December 24, 2020
We believe this is a fantastic time to increase your trading education.
Most people around the world will have a great deal of time off between now and the new year. We believe this is a fantastic time to increase your trading education.
Your saviness at identifying fundamental themes or your unparalleled ability to conduct technical analysis is only as good as your ability to manage a trading position.
We have every confidence that these lessons and their compound effect will make you a far better trader in 2021. Providing you with the financial independence to live your dreams.
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The Art of Managing a Trading Position
If you are a regular reader of the Market Meditations, you will know that we are big advocates of creating and implementing well thought out trading strategies ✅
If you aren’t a regular reader (welcome) or if you need a refresh, broadly speaking, this incorporates:
1️⃣Understanding your reasons for entering the trade
2️⃣Conducting your own research and analysis (fundamental and/or technical)
3️⃣Selecting your stop-loss and take profit levels
Once you’ve done all that, does that mean you can sit back and let the crypto market do its thing? Definitely not.
This is a fluid and dynamic market. Whether it is technical breakouts or news events like we have seen with SEC and Ripple, there are constant price developments that create new opportunities or alter previous expectations.
What this means, is that managing a trade is just as important as the planning that went into establishing the strategy in the first place.
At any given moment, a fundamental or technical development can completely undermine your trading strategy. You need to stay on top of the news and price action so you aren’t caught off guard.
To do so, you can check whether your preferred platform provides rate alerts.
You can select price levels that are important to your trading strategy. If these price levels are hit, the platform will create some sort of noise/pop-up to inform you.
Of course, Twitter ? can also provide key real time updates which are important to stay on top of.
There is no point hanging on if your reasons for entering the trade have been contradicted by a market development. You must be able to adapt your trading strategy as part of your monitoring of your trade.
Changing Take-Profit Levels
This is a slippery slope but alas, part of managing your trading strategy. In general, increasing your take profit levels undermines your discipline as a trader and also the thinking that went into your trading strategy. Beginners should avoid this.
That being said, as you gain experience in the markets your ability to make discretionary decisions improves. For the more experienced traders there are a handful of occasions where you may want to consider it:
Major news events. Sometimes a major event can run hugely in your favour and make it sensible to increase your take-profit range. For instance, if you were short $XRP.
Liquidity issues. Low liquidity can generate serious price movements. You may want to get out of your position to protect whatever profit you have. Prices can gap and you can be left losing whatever you ended up making.
Technical indicators. A significant breakthrough (fibonacci retracement level, key support/resistance etc.) might warrant an increase in your take-profit level. Of course, this is in reference to levels that have passed the test of time. It doesn’t apply to hourly, daily or weekly levels.
Worth covering these reasons but to stress once more, this should not be a regular thing.
Updating Stop-Losses to Protect Profits
In contrast to changing take-profit levels, this is a trade management step that you might want to consider more regularly. When you have got a profit in the market, taking steps to protect it is always a good move.
When coming up with a trading plan, it is always important to consider what price levels need to be broken to justify moving your stop-loss. This ensures you are prepared and ready to act while the rest of the market digests the new information.
When technical support/resistance points are broken, it indicates that the market has seen fit to move prices into a new territory in the overall direction of the trade.
You may want to adjust your stop-loss level to just inside the broken technical level. If the market has second thoughts about sustaining the break, your adjusted stop will then take you out of the trade.
It may be prudent to leave a margin of error around the technical level. Otherwise, if you set the stop too aggressively, you may risk your stop being triggered only for the market to move on to make new gains.
As always, it’s a trade off. To learn more about placing of stop losses and the different strategies you can incorporate check out the video below:
Executing your trade is one step on a long road. Incorporate these tools to manage your trading positions. Otherwise, you may find the best trading idea results in no profit at all.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.