Updated from its original posting on 2011-12-09
As I always mention, preparation is only half the battle. So what makes up the other half? Execution. In trading, actively managing open positions is just as important as coming up with your plan. Here are three tips to help you manage your active trades.
1. Stay in touch with the market.
Whether you’re a hardcore technical or fundamentals trader, or maybe a little bit of each, you can’t deny that economic reports influence price action. This is why it pays to keep tabs on the events that pose risks to your trades.
Some say that the market’s reaction to the news is more important than the news itself. But how can you make the most out of a reaction if you have no idea about the news event?
Don’t forget to always pay attention to potential game-changers that might invalidate or at least divert from how you expect your trade to play out.
2. Be flexible with your trading plan.
If you have read the School of Pipsology then you should already know how important it is to be flexible with your trading plan. Of course, being “flexible” doesn’t mean being totally spontaneous and not following your initial plan at all. It just means that you’re making adjustments based on factors that have changed since you made your initial plan.
Being flexible requires you to constantly check the validity of your setups as time passes by. Also, keep in mind that the longer you keep your trade open, the more you expose it to different event risks. How long did you initially plan to keep your trade open? Is your setup still valid after a few hours, days, or even weeks?
Let’s say you spot a potential double top on AUD/USD as an intraday trade. You shorted at the “top” and wait for the price action to go down. But after a few trading sessions you see that the pair is just ranging near your entry level. Is your “double top” still valid, or should you take your profits early?
3. Update your orders and position sizes.
Just because you have the ideal reward-to-risk ratio and the “fool-proof” trading plan doesn’t mean that you shouldn’t also tweak your order levels and position sizes. Remember, you want to minimize your risk.
If one or two factors in your trading plan don’t go your way but you think your idea still has merit, you might want to cut back on your position sizes. On the other hand, if you find that the price action turned out to be better than what you expected, you could also consider adjusting your stop losses or taking partial profits. It would be a lot better if these adjustments are included in your initial trading plan in the first place, but better late than unprofitable, right?
Keep in mind these three simple tips when you trade so you don’t end up wasting your well-thought of trading plans. Before you know it, these practices will have already turned into habits!