Great Educational Posts by Great Traders

[ZoZoStockWatch]

Swing Trader
Updated: 13-Sep-06 16:12 ET

Managing Winning Positions

Diverting from my usually market commentary/analysis as a few recent emails asked how I manage positions and risk. For starters, there are 3 cardinal rules of trading that I ask myself before entering each trade and I suggest you do the same.

(1) Is the trend up or down? Usually identified by a simple trendline, but I also use the 10, 20, 50 and 200-day moving averages.

(2) Am I going to take a trade "with" or "against" the trend? This is the most important question to answer. It defines whether or not you are bottom-picking or picking a top. Counter-trend trades carry more risk since you're betting on a reversal of current momentum. I typically will trade 50% of normal position size on "counter-trend" trades. If you're new to trading, you'll likely want to avoid these types of trades until you feel very comfortable in doing so.

(3) Where's my risk? No trade should ever be entered without knowing where you will take a loss. I typically have a 1.50 pt stop on most trades, depending on volatility in the name and how far price is away from a significant support/resistance.

As for profit-taking, I try to avoid specific targets as much as possible. My personal experience is if you have a target in mind, you'll wind up either failing to take profits because that target is never met or you wind up taking profits too early as price continues well beyond that target. The solution to this problem is focusing on ideal entry points and taking Partial profits. Since I usually risk 1.50 pts, I will typically consider locking in profits when gains fall between 1.50 - 3.00 pts. After a partial is taken, I'll then move the initial stop-loss of 1.50 to the breakeven level. That way if price reverses against my position and comes back to breakeven, I at least got some profits in the bank. If price starts to exceed the 3.00 profit zone, I will then consider trailing the balance stop along the 10-or 20-day ma's, depending on the momentum. Parabolic moves and overnight gaps warrant moving stops to previous lows and highs.