Strategy & Psychology

"Let Profits Run"

I've finally completed my AMZN trade after hitting all my rough profit taking target areas. I trimmed profits at each area offensively as price action moved into strength. Profits were taken at +101%, +121%, and +140%. This originally started out as a swing trade but since price action was constructive, I let profits run by rolling it into a position trade. I was very passive and patient with my stops, giving the trade plenty of room to run. Once I locked in gains at +101% I reassessed my stops for anticipated volatility. Generally, I don't like to see price action drop below 20% or more below the 50 SMA. So, if I have a generous profit cushion, I will try to find a prior swing high with multiple retests (above and below) in that area.

My strategies involve both quantifiable guidelines (setups, triggers, entries, stops, and exits) and qualitative discretion (different types of entries, stops, and exits based on context and price action). I won’t manage a day trade exactly the same as I would a swing or position trade, but they do share a common framework for identifying opportunities, relative reference points for evaluating price action, guidelines for triggers, and a repeatable stop management methodology. I won’t manage a trade with a small loss the same way I would one with a huge profit cushion.

A good strategy minimizes losses, keeps you in a winning position, and keeps you out of a bad one. It’s a repeatable process. Its principles aren’t arbitrary. How rigid or flexible it is must be based on a proven edge. Most of trading is done before the market opens. It starts with a plan, but most traders don’t really understand what a plan is. What entries will you take? A breakout or a retest entry? When is one better than the other? What if you’re late, then what? Will you manage your stops the same in steady and  volatile price action? Or does that guarantee a loss? Can you identify when a trend or range is beginning or ending? What does that mean for new entries? Or exits? A trading plan is like a sports playbook. If “this” then “that”.  What’s the plan if things go as expected? What’s the plan if they don’t?

Strategy is the easiest part of trading. Yes, it takes significant time and effort to clearly define your guidelines. If done right, a trading plan is an evolving document shaped by the post analysis of one’s performance. And as new, unfamiliar trading scenarios occur gaps in trading knowledge and experience are discovered and addressed. The most challenging part of trading is mastering one’s psychology. It takes courage and compassion to understand oneself. It takes awareness and practice to transform fear (fear of missing out, fear of giving back profits, fear of a loss, etc.) from an obstacle into a valuable asset. Good trading always involves both, a clearly defined strategy and the psychological resources to gently maintain emotional equilibrium. Neither can be ignored for long because the market will relentlessly find your weaknesses and point them out to you in the form of losses, choked trades, and frustration.