What do you do once you’ve entered a trade? Do you already know where you’ll exit, be it a win or a loss, or do you just meander along until you feel like exiting? Or, even worse, do you sit there and agonize over every single move in your stock; exiting too early or too late and losing loads of money along the way?
Micromanaging Your Trades
You’re bleeding cash. You watch every twitch and wiggle of the price and each move causes you a little more anxiety. You rationalize exiting early or a little too late and each time you either lose money flat-out or you don’t profit where you should have. You’ve spent countless hours developing your trading and still you don’t trust yourself.
Anne-Marie (of AnneMarieTrades.com) recently addressed this issue in her article “No One Likes a Micromanager Trader.” In her article she pinpoints the root of this issue:
Why do we micromanage our trades? The answer is simple: Fear and greed… It is reactionary behavior based on the impulsive fear of loss [or] potential for gain.
This is absolutely true. On a primal level we love our money. We want to protect it when we can, and we want to grab handfuls of it when the opportunity presents itself. The problem with primal thought is that it gives little regard for the long-term. It wants results NOW. It doesn’t care if we’ve spent hours of our lives honing our trading skills. It doesn’t care that a bad day, week or month does not mean we can not provide for ourselves or our families. It doesn’t understand that we will prevail in the long-run.
Ways to Overcome Primal Thinking
Anne-Marie provides a few solutions to this problem in her article:
How in the world do we break a cycle of reactions based on fear and greed?…We achieve this with training. You can work on training yourself, find a mentor who might take you on, or you could hire a coach. Training creates discipline, discipline creates routine, and routine creates habit.
Again, this is true. We can break this cycle with training. I presume by “mentor” she means someone that will do this for free. The likelyhood of finding someone who will do this for free is slim-to-none. Unless you are related to this mentor, people who have broken these habits have better things to do when the market is open than break your bad habits. They are probably out on a yacht somewhere drinking expensive scotch and making fistfuls of cash.
As for hiring a coach; these people come at a pretty hefty price. If you are looking to pay someone $1000/day to cuff you in the back of the head every time you do something stupid, my email address is on my “About” page. I have some spare time and I’m always up for smacking the shit out of someone for being an idiot. The first slap will come knuckle-first in reaction to you having hired someone to tell you what you’re doing wrong. You know what you’re doing wrong. You can overcome this on your own.
Using Advanced Orders for Trade Management
One of the tactics I’ve used to overcome this primal thinking is the use of advanced order types. One of these advanced orders that I find addresses this issue is called the OT/OCA, or more commonly, a bracket order. This combines the following two conditional orders:
- OTT (One Triggers Two) – When the first order is filled, two more orders are entered. These two new orders both act as OCA orders for each other.
- OCA (One Cancels Another) – When one order is filled, the other order is canceled.
This allows you to enter the trade manually, and then your carefully crafted plan executes automatically. I like this approach because I don’t do purely systematic technical trading. I prefer to watch my stock’s chart and tape, and enter using my own discretion. From there, though, my plan is set and I’ve found it easier to let it roll without second guessing myself.
As I said above, you’ve put a lot of time and effort into creating a trading strategy that works for you. So let that system do exactly that – work for you. When you start second-guessing your strategy you are working against it. Utilize advanced order types and trade management to get the most out of your trading without completely handing the reigns over to a computer.
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{ 8 comments… read them below or add one }
I think what you described is what I accomplish by using a bracketted order which consists both of a hard/trailing stop and a limit order for the target. Such orders uses the wisdom of talking to yourself (per Dr. Brett), because in order to set them, you need to KNOW the essential aspects of the trade well ahead of the actual execution. Too many traders enter a trade on impulse and leave out the details that can both protect capital and book profits.
More than one bracketted order can be set up so one can scale in and out of a trade in order to book partial profits if that kind of management is preferred than all in and all out.
Your comments are awesome.
The planning portion of the trade is often overlooked. Impulsive trading will kill an account quickly. Traders definitely have to take the time to plan a trade properly in order to utilize these advanced order types.
You’re right about using multilpe orders too. Using more than one of these order types gives one the flexibility to adjust this technique to fit his or her personal trading style.
Thanks for your insights, Michelle.
Thank you for suggesting OT/OCA to overcome fear and greed. I agree that it is a very useful tool for swing trading set ups. But for day trading, when you follow the trend, I find it difficult to set targets though we can place stops in advance. I try to exit after the close of the candle that violates the trend line.
Any suggestions?
Ravi.
Hi Ravi,
While the OT/OCA is a useful tool, it might not fit every strategy. I tend to pick targets based on support/resistance, whole numbers, and technical factors. I also scale out of my trades, as Michelle mentioned in her comment.
Perhaps an OT/OCA can be utlized with your style of trading by having one of the OCA’s act as a hard stop, and the other as a trailing stop. The trailing stop would allow you to lock in profits if you happen to get distracted when the trendline is broken. If you’re only trading 1 stock and you watch it like a hawk though, this might not be necessary.
Hope this helped!
Definitely useful. I’ll give it a try. One downside that I can think of is that if a candle happens to have a wider range it’ll stop us out even if the trend is intact. As you mentioned, this gives us some flexibility to avoid watching our position closely.
Thanks,
Ravi.
You’re right about that downside. The trick is giving your stock enough room to run its course.
Hey Jason,
I think you’re doing a great job with the blog…light enough to keep it readable but with a serious message hidden. Your approach makes a lot of sense, and at least partially protects you from fear and greed right off the bat. Are your stops levels-based or dollars-based? Levels makes more sense, but you also risk extra slippage if levels are known. I’m a little longer-term, so buying calls and puts kind of acts as my built-in stop and frees me of worrying about the disaster scenario. Hardest part for me is the part in between obvious losses and easy windfalls, which covers a lot of ground!
Hi Derek,
Thanks for the compliments. I like to keep things light. There are plenty of very serious trading and finance sites out there, so I might as well have some fun here.
My stops are almost always level based. I’m okay with a little slippage. I’ve found that battles take place at well-known levels, so the slippage is mitigated a bit.
I’ve never traded/invested long-term, and though I’ve read a bit about options I’m not well-versed. I understand, though, that they are often used to hedge against positions that you feel may go against you for a period of time. From what I know, options seem like an interesting possibility for trading & investing and I really need t0 learn more about them.
Thanks for commenting, Derek.