Entering a trade is the easy part, it’s exiting a trade where you’ll determine whether you make or lose money.
Two traders, Tom and Jerry, could take the same trade but have two totally different outcomes. Tom will make money on the trade because he properly managed his trade and planned an exit for different scenarios.
Even if he loses, he will know when to stop the bleeding and get out with a smaller loss. Jerry on the other hand, does not have a plan in place. He does not know what he is going to do if price goes drastically against him, eventually wiping out his account.
It’s critical to determine how you will manage the trade BEFORE you enter the trade.
You do NOT want to be making critical decisions in the heat of battle.
When you enter a trade, you should have already decided how you will react to every possible outcome.
Try and figure out all the possible variations that could occur and decide BEFOREHAND what you will do. You want to be a cold-hearted, emotionless execution robot when in a trade.
You want to be like Spock but without his human side. You want to be a Vulcan trader.
All decisions are made BEFORE a trade. You are proactive. This means you are not yet in the trade! When deciding to enter a trade, you simply refer to what you wrote here. This eliminates any seat-of-the-pants decision making.
If you do take the trade, you already know where your initial stop loss will is placed, where your profit target(s) are, if you will trail your stop, where you might get out of your trade early, etc.
Pretend you’re Keanu Reeves. If you were to be given a pop quiz at any point in time during the trade, and are asked, “What if price does this or that? Or if price goes here or there?” You should be able to answer in a snap without thinking, for every single trade, every single time.
You must have your trade management rules fully planned out ahead of time, BEFORE the trade is initiated.
You NEVER EVER want to be thinking “What do the hell do I do now?”‘ when in a trade.
The time to decide such things is always, always, always BEFORE you ever enter a trade yo. Word?