I was a manager in the business world for over a decade before I became a full-time trader. At the time, I didn't realize how well that earlier endeavor would benefit my later market obsession. As it turns out, swing trading depends heavily on effective management, from idea through execution.
Traders need to manage both time and information with great proficiency. After all, short-term speculation reflects a very attractive time-to-cash profile that will yield greater profit over shorter time periods than simple investment. But this discipline also triggers heavy losses quickly without continuous intervention and adjustment.
The objective is to exploit market inefficiency that is revealed through price patterns. With this in mind, trader-managers measure reward vs. risk, stay defensive and play the game with complete detachment. They focus on optimizing entry and exit over all other considerations, navigating positions through a maze of time frames and shifting markets.
Profit requires flexibility but not too many trading strategies at one time, so traders focus their attention on the solid plays that take advantage of crowd weakness. They realize that success rarely depends on chasing the hottest stock or playing the latest news. They head down a less-traveled path and look for original plays that incur less risk. They take a little money out of the market each day, knowing it can eventually produce a sizable fortune.
Trader-managers examine the time character of each part of the market day, aligning positions in accordance with its major cycles. At all times, they keep one eye on external events that can turn rallies into selloffs in just seconds. They stay informed and seek opinions, but they only trust the numbers.
Trade management begins with this golden rule: Good entries on bad positions make more money than bad entries on good positions. Consider a hit-and-run strategy rather than holding on through pullbacks and reversals. Increase share size to take substantial profit, but walk away quickly to manage risk. Learn to scale in and out of positions as market conditions change. Above all else, remember to enter in mild times and exit in wild times.
Look for convergence every step of the way, from preparation through profit. Prediction improves greatly when elements converge through different forms of analysis. Assume that each new point of convergence raises the signal-to-noise ratio of your trade setup. When your ducks line up in a row, the fog can lift so quickly that price prediction becomes crystal clear. Act without hesitation when retracements, moving averages and trend lines fit together in perfect unison.
Step in front of the crowd on pullbacks, and stand behind them on breakouts. Be ready to move against them when conditions favor a reversal. Stand aside when confusion reigns or the crowd lacks direction. Recognize emotions through the numbers and become a student of herd psychology. Realize that every pattern has a breaking point where the crowd will lose control, give up or show irrational exuberance. Find it and execute your trade just before they do.
Market orders undermine trade management, because they make us chase our tails. On the other hand, limit orders force discipline and strategic thinking into our game. They assist our management, because they bind decisions to specific numbers. For example, consider placing a limit order at a deep retracement level and then walking away. It will only execute if and when a low-risk opportunity appears.
Avoid external information that does not advance your performance. Stay away from the stock boards, turn off the financial TV and shut down the news ticker. Never mix fundamentals and technicals, because one usually lies while the other tells the truth. Watch out for personal bias that will ruin your trade. The end of the world may come soon, but not in the next 30 minutes or three days.
State-of-the-art technology makes a good trader better, but it won't help a loser. Effective trade management depends more on reading the charting landscape than buying the latest software. As management skills grow, you'll realize that execution systems become more transparent and less urgent to your profitability.
And you'll understand that your sole purpose when the market opens each morning is to take the crowd's money before your own pocket gets picked.
