One of the main tenants of trading is to respond to the information presented too you and respond almost robotically to your pre- conceived plan of action. YOU never enter a trade without an exit strategy. Recently I took a vacation outside the United States and returned on August 21, 2015. Now that day may mean something to you, because it’s a standout day in the 2015 trading year! Why? The DJIA fell 531 points to a figure that was 10% off the May high for the index?? Now I wasn’t foolish enough to leave trades on the table without broker instructions, yet I still have my long term portfolio in place. In June I was leery of this market, we had hit a new high in May with little fanfare and moderate volume. I look at that as a weak sign, the breaking to a new high without some meaningful follow through by program traders with buy-stops above the resistance level- signaled trouble, to me. But, sometimes the market needs some time to digest the new level and build momentum for the next leg higher. Through June, that follow thru had not materialized. We were still in a trading range, but in my mind any move above or below signaled action! I watched and waited- poured over the charts and was very lucid as what I planned to do- a break above the resistance- put unused capital to work and buy buy buy. A break below support- pull some money off the table, reduce risk, and preserve capital for the turn around so… sell sell sell.
The break below support happened on Wed August 19th, the downward move on the 20th was a confirmation of the signal. Foolhardily, by the time I sat down on Sunday night to review charts- I thought, I missed the move- HOPE for a rebound so I can pull the trigger on the move I missed:
Black Arrow = The signal day
Green Arrow = Confirmation day
Red Arrow = (TDTPTT) The Day To Pull The Trigger!!
However Monday the 14th I sat paralyzed (markets can do that to you)- Literally- the day I finally made the move (a full 8 trading days later) the market was a full 500 points below my mental (chart base) exit (positions) point. A full 2.95% below where I should have been out. Now suppose the market goes 5% against my position (no position is a position if I closed out trades I’d been holding for some time) I’m down 5%- but If I would have pulled the trigger I would have still been up 2%- the numbers are really that dramatic. That’s a 7 point swing in portfolio value- 7%!- fund managers would love to average 7% yearly. Now, I have to absorb more percentage loss if the trade goes against me- if I use the same stops (chart based) I would have, had I pulled the trigger on the signal. If I change my stop based on my (new) entry- the trade may go against me- stop me out- and then move in the direction I was anticipating. I naturally have to accept more risk above the initial percentage had I taken the trade at the right time. On the other hand, to use the same chart based stop and percentage of funds- I would have to reduce my trade size- and potentially give up profit that I would have made, had I taken the trade at the appropriate risk level. Sometimes the trade still goes in your favor- and maybe times like that the lesson isn’t learned- but it should be. Trading isn’t easy- and it becomes even harder when you don’t follow the rules…..
Suffice to say- Not pulling the trigger limits potential profits and exposes you to more potential risk- How’s that for a double whammy buzz kill!