Trading discipline for the inexperienced says you should have your plan in place before you trade, so what's the next step?

Trading is like the tv series The A-Team, you can't do zip without a plan. It doesn't matter what level of experience you have you should always have idea of where you will get in and where you'll get out. For the less knowledgeable trader, having a plan should be top of the list of things to do before you hit a button.

Get your plan together people

A stringent plan can mean the difference between reducing your risk and emotion, or becoming the deer in the headlights in an offside position and making hope your strategy. It gives your trades definition. You know what you want to make but more importantly you know what you could lose. Even now after over 20 years in the game I will use what I call a disaster stop while I tinker with a trade. This is a stop I put in place that covers that left field news or data that can blow a trade up. It may not have anything to do with the original plan but it's there for peace of mind.

When you've gained sufficient knowledge over time you can move on to managing that original plan and making adjustments to suit the market environment. .

Markets aren't black and white so often a plan can look good one minute and revolting the next so what's the best way to manage a trade?

There's many different ways to adjust a trade while keeping to the plan.

  • You can reduce risk by taking part of a trade off and moving stops to break even. That's often a good idea when a trade is in profit. Instantly you have a free trade.
  • Adjusting exits and stops so they don't sit on big technical levels is another management tool.
  • Reducing a small part of a trade can mean you can move your stop further away without increasing your risk.

There's also bad moves you can make. Moving stops because the price is close and you don't want to lose money is often a bad move as you can get into the position of constantly doing it and losing more and more. Just another 5 pips can become, just another 5 pips more, then just another 10 pips, then just another 5 pips. Before you know it you're 50 pips worse off on your stop and still getting stopped out.

It's always tough trying to manage a trade. You always want more profit and less loss. You kick yourself about whether you should have gone for those extra 5 pips after watching it gain those 5 then lose 20.

Profit management is just as important as loss management. You want to try and maximise every winner but not at the expense of managing risk.

You can trail stops behind a winning position. In doing that you can move your take profit point up 5 pips, 10 pips, in the opposite manner to lowering stops the same way and making you worse off, while all the time your trailing stop moves with you.

Ultimately however you manage it there should always be a point where you have a line in the sand that says "if it hits that line I'm out", whether in a profit or loss. Even if the price moves further your way after you've banked it, it doesn't matter. You had a plan, you managed it well, you made money. That's the end game in trading. Those extra 5 pips you could have had is fictitious money. What's in your account isn't. Move on to the next trade.

This is all leading to a point. In my 'USDJPY long what next' post, reader Si asked where my stop would be now.

Originally my stop was under 112.00 while I was away from the market overnight. That was my disaster level. The trade is still in profit and I'm over another hurdle that was the CPI data. I wanted it higher and it obliged. Now I need to think about the next step and the FOMC. I still like the plan. I still feel the Fed will be more hawkish than expected however, I'm now in the money, past two moments in time where there was risk, and I don't want to give it all back by being careless.

I'm now looking at three options;

  1. Take it all off 20-30 mins before the FOMC so I can put my feet up and watch the show.
  2. Take half off and put the balance on stop at break even.
  3. Take half off and move the stop to the same pip amount away under my entry as the profit I take on the first half half (i.e if I take half off for 60 pips profit, my stop will be moved to 60 pips under my entry.

The last option means I'm potentially risking making nothing but what it does do is give me 120 pips of potential movement in the trade instead of 60 with option 2. It means I might be able to run it through any noise over the event. It's the option I'm leaning towards now. I've moved my stop closer to my entry for now and will make a final decision nearer the time, price action permitting.

These are the dilemmas we can face when we want to fine tune a trade. The most important part is doing it before you hit that risk event not after. Sometimes you'll get it right and sometimes you'll cock it up. The overwhelming fact to gain is that at every stage it will be you who is control of your trade, not the data, not a talking head, no one but you, and that's the way it should always be.