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Trade Management: How the Money is Made (or lost)

Regardless of how good of a market overview you do prior to trading; (market overview is how you select the market you are going to trade,and how you determine which direction you are going to trade t from) no matter how pristine of a trade set-up you identify, and no matter how timely your trade trigger, odds are you are going to lose money on the trade, because you are going to mis-manage it.

Trade management starts the second you click the mouse.  The market can only do three things. Go up, go down, or go sideways. Therefore once you are in a trade, the market can either go your way, go sideways — meaning flirt back and forth between a profit and a loss — or fail and stop you out.  A professional will make money in two out of three of those situations. An amatuer will make a small profit on one, and lose on the other two. With odds like that you start to see why so many don’t succeed.  And we won’t even go into them trading on retail spreads and relying on thier broker for quotes and charts.


One way past these pitfalls?  Use a method that only gives signals on the close of the candle. Most methods work this way — be it a moving average cross or a momentum shift. You need to wait for the close of the candle, otherwise a moving average cross can uncross, or a break-out can fade, or a momentum pulse can disappear. By using a method which only calls for action on the close of the candle, we insure that the method is easily back-testable. A method that doesn’t call for action on the closing price cannot be relied upon to give an accurate back-test. 

When manually back-testing your method you need to pay attention to intratrade draw-downs.  You need to start to pay attention to how many times prices goes into smaller sideways ranges, and you have to start to imagine how that will feel when you are actually in a live trade. You have to understand that it’s routine to have intra-trade drawdowns and that if you mismanage them, even in a demo account, you are wasting your time, because there is no way you will succeed by acting on what you think is going to happen as opposed to what your trading plan calls for you to do.

Set-ups and signals make up a fraction of the time you wil spend actually managing a trade. This is why both back-testing and demo trading are so important. Yes you will certainly need patience and courage, but without a method which you can back-test to the point where you subconciously believe in both it and your own success, your mind-set will not matter.