Trade Entries and Exits. Money Management Secrets for Successful Trading

Summary

In this insightful conversation, a seasoned trader shares their approach to managing risk and exits in both forex and stock markets. They emphasize starting with small positions, using stop losses based on technical indicators like ATR, and avoiding averaging down on losing trades. Profits are locked in through trailing stop losses and Fibonacci extensions, while attention is paid to market breadth and sentiment, especially for small-cap stocks. The speaker also touches on their long-term investment strategy, holding stocks as they rise, but remains primarily focused on disciplined trading techniques to capture gains and minimize risk.

Takeaways

• 😀 Trust your intuition: Sometimes, your gut feeling can indicate when a trade setup doesn't look right, even if the technicals seem fine.
• 😀 Start with a small position: Begin trades with a small size and a well-placed stop loss to minimize risk.
• 😀 Protect your profits: Always aim to lock in at least half of your profit before it erodes, and manage your trades according to pre-defined rules.
• 😀 Discipline is key: Avoid breaking trading discipline, such as averaging down on losing positions, to maintain consistency and control.
• 😀 Risk management matters: Split entries or adjust your position sizing to manage total risk, but make sure the overall exposure doesn’t exceed your risk tolerance.
• 😀 Exiting trades is challenging: It's harder to exit successfully than to enter, so always have a clear exit strategy, such as using trailing stop losses or technical indicators.
• 😀 Market sentiment affects small caps: Be cautious with small-cap stocks, as their volatility is often influenced by broader market sentiment, which can change quickly.
• 😀 Fibonacci extensions for exits: Use Fibonacci levels, particularly the 1.618 extension, to identify strong exit points during pullbacks.
• 😀 Understand general market conditions: Monitor the broader market for signs of a downturn to adjust your positions accordingly, particularly with stocks that are sensitive to sentiment changes.
• 😀 Trading vs. investing: While the speaker is primarily a trader, they also maintain a portfolio of investments and acknowledge the challenge of balancing short-term trading with long-term holding strategies.

Q & A

What is the speaker's approach to determining when a trade has failed?

The speaker relies on a combination of technical structure and intuition. While they try to remain clinical, they sometimes rely on a gut feeling, such as when a trade 'creeps up' and feels wrong before it breaks out.

How does the speaker manage risk in their trades?

The speaker starts with a small position and uses stop-losses placed strategically outside of market 'traffic.' They aim to limit losses by not giving away more than half of their profit and use tools like Average True Range to determine stop-loss levels.

What is the speaker's stance on averaging down in losing trades?

The speaker does not believe in averaging down on losing trades, as they view it as breaking trading discipline. However, they acknowledge that some traders use a split-entry approach to manage risk, with careful attention to limiting the overall risk.

What is the risk of averaging down on a trade, according to the speaker?

Averaging down is compared to breaking a diet, suggesting that it compromises trading discipline. It can lead to a lack of control over risk and can result in larger losses if the market doesn't turn in the trader's favor.

What strategies does the speaker use for exiting trades?

The speaker uses several strategies for exits, including trailing stop-losses to lock in profits. They also monitor general market signals, such as a 'confirmed call' indicating a market downturn, and adjust their positions accordingly.

How does the speaker deal with small-cap stocks in relation to the broader market?

The speaker is cautious with small-cap stocks, as they are often influenced by small traders. If market sentiment changes, liquidity can dry up, making it harder to exit positions. Therefore, small-cap stocks are monitored more closely in relation to the general market trend.

What role does Fibonacci play in the speaker's trading strategy?

The speaker uses Fibonacci levels, specifically the 1.618 extension, to identify exit points in forex trading. This helps them time the market and optimize profit-taking during pullbacks.

How does the speaker balance trading with investing?

Although the speaker is primarily a trader, they also maintain a portfolio of stocks that are performing well. They hold these investments as long as they continue to increase in value. They have made mistakes by exiting investments too quickly in the past.

Can you give an example of the speaker's successful investment strategy?

The speaker cites their investment in JD Sports, which they held from 3 to 15 pounds. Despite a stock split, the position has been very profitable, although the speaker recognizes they now have an overly concentrated position in this stock and may need to rebalance.

Why is it important for a trader to have an exit plan?

Exiting a trade is often more challenging than entering one. A well-thought-out exit strategy helps the trader lock in profits and limit losses. The exit plan is a critical component of risk management, ensuring that decisions are made based on pre-established rules rather than emotions.