There are a lot of great reasons to day and swing trade. Unlike more passive, long term forms of investment, you can make larger gains, enjoy regular cash flow, and avoid big draw downs. That said, many traders think this means they must always be trading actively, jumping in and out of trades. In my experience, this is one of the most significant sources of loss for traders of every experience level. I get it! Trading can be addictive, especially when it’s going well. But sometimes, you need to wait.
There are two situations in which sitting on your hands can be the wisest course of action. The first is an unfavorable market environment. Sometimes the market as a whole isn’t conducive to low-risk, high reward trading. The second type of sitting on your hands involves trade management and that’s what I want to talk to you about today.
Accurately identifying chart patterns is a vital skill for day and swing traders, but if you don’t have the patience to wait for them to setup and then trade them correctly, it’s irrelevant. That’s one of the reasons I talk about volume patterns so often; recognizing expanding volume can help you enter with precision and confidence.
It works the other way, too. You need to know when to exit a stock and when to sit on your hands. Oftentimes, our instinct is to do the opposite of what’s beneficial. When your stock is down at a stop-loss level, you don’t want to admit your original thesis was wrong and cut your loss, so you let it ride. Then when your position is up, you close it in fear that it will reverse and we’ll lose our gains. I recently made a trade that illustrates this second point.
I entered $BOOT at $13.35 and then exited again at $14.05.
As you can see, it went considerably higher from there. While I made 5.24%, I could have made considerably more if I’d practiced some patience. It had not broken its trend, so there was no good reason to get out where I did.
Some tips for cultivating patience and practicing good trade management:
1. Know your strategies. Understand the ideal entry and exit points
2. Establish stop loss and profit-taking points before entering the trade and then stick to them
3. Take partial profits if the stock goes up. If you fully understand your strategies you will be able to identify good spots most of the time.
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