Add a Little Nuance

Hi Mike, hoping to borrow just a bit of your time for another trading question.

I continue to find that the most difficult part of trading is deciding when to take off a winning trade. I believe the problem is that I am not confident and decisive enough in my plan when I enter trades. When it comes to my stop-losses even though I mostly hold them mentally I am quite disciplined in hitting out at the price that I commit to before the trade. I think this is a price that I fully digest and feel confident about when I enter trades, thus I don’t have reservations about following through. When it comes to price targets and taking off profitable trades I seem to vacillate between a number of strategies and approaches.

For one, I know I suffer from recency bias. One day I commit to taking a trade off at a certain level because it is an acceptable reward for my risk and a level where the stock may have support or resistance. I do so and the stock trades cleanly through my price, offering no particular reason to exit the trade. The next day on a similar trade I commit myself to staying with my trades as long as the trend is intact, and letting them working for me. Inevitably I give the the stock room at my initial target and it reverses and I give up a substantial to entire percentage of unrealized profit. I realize this is a frustration common to all traders, for whatever reason it seems far more painful to get out too early and watch a trend continue than it is to accept a predetermined loss. Rarely do stocks just move cleanly though, they are going to try to shake you out this is when I stuggle with making a decision about staying with a trade, or realizing profits.

So I ask myself (as I try to do before I fire off another email), what would Mike say? I think you would say that I need to be committed to the type of trade I am trading. I try to employ many of the PlayBook trades you teach (trend consolidations, reversals, breakouts, gap fills, and 2nd day trend continuations). I have embraced what you and Steve has repeated on many occasions, that in the first 30 minutes stocks aren’t necessarily trending, and a decent move relative to ATR needs to be taken off. On the trend trades that I initiate after 10:00, however, I never seem to know where to end these trades. Theses are the trades that can be the big winners, but often staying with them means withstanding pullbacks of 50% after substantial moves.

Part of my predicament is that I am still a novice trader almost always trading 100 share positions, thus its not really possible for me to scale out of trades. How do you advise your newer traders to handle these trades? Is it more important to just make successful trades that move from point A to B, and worry about the big winners down the road? Or is it important to develop the skill for staying with good trades from the beginning? Some of the setups I mentioned could be used to initiate “Trades2Hold”, so how do you distinguish between these trades and ones that need to be taken off when profit targets are met? I don’t second guess myself when I am cutting losses, so is there a way to get to more comfortable with my decisions when taking profits?

Sorry for being so long-winded, I am most appreciative of your time and entirely grateful for all the knowledge you and Steve share on the SMB blog.


I had a very similar question asked by a mentee on our desk yesterday. We talked in my office and worked through the issues you discussed above. So let me share some of my thoughts with you.

The good news is you understand the trend trade and you are working on building these trades for your playbook. You are gaining valuable experience with this one Trade2Hold. The bad news is you do not know when to exit 🙂 and I am certainly not here to answer that question for you as that would be of no help. That would offer no real chance of sustainable improvement for you. But I can give you some more specific guidelines that you can think about to add nuance to your trend trades.

You’re assuming that the trend trades are just a case of getting short, holding, and hoping for the best. Some are. Some aren’t. And you decide which ones to cut, add, piece out of and where. You decide what will get you to do any of these. But let me offer some hints.

If I am in a trend trade and I do not like the way it is moving away from prices then I lighten up. If I am in a trend trade and new increasing volume enters after a steep down move then I exit almost all of my position. If I am in a trend trade on the short side and the market is super strong like yesterday this will give me cause to exit/lighten up. If I am short and there appears to be tons of buying on the way down then I lighten up. This smells of a reversal pattern to me in this market.

A good exercise is to sit and investigate all the characteristics of the clean-trend trade like in CECO yesterday. What are the typical characteristics of a clean-trend trade? There was a government investigation coming. Not good. It was technically broken. The down moves were clean when levels failed. And on and on. So that the next time you see a similar trade you have conviction that this will be the clean-trend trade.

OK, so I can’t go through all of the subsets of a trend trade in this post. But I can get you to start adding nuance to your trades. You can start thinking about when to add, lighten up, cut, exit, and reevaluate.


One Good Trade

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