Have you ever built a house? If so, you will appreciate the fact that having a good foundation is non-negotiable. An architect can have the best blueprint in the history of the world, but without laying a foundation, it’s meaningless.
It is the same for us when it comes to investing in the Forex market. Before we can build our “wealth house”, we need to have a foundation in place, a Forex Trading System that will create an environment where our capital can be protected and prosper.
There are multiple pillars to a Forex Trading System. Today I want to talk about Trade Management.
Trade Management TheoryMore than Trade Entry, Trade Management is what your Forex Trading success relies on. It is arguably the most critical aspect of all trading. Anyone can enter a trade at the right time, it is exiting a trade at the right time that will distinguish you as a winning Forex trader.
The word “management” simply means “the conducting or supervising of something”. Since you are responsible for the results of your account, you have the authority to conduct and manage it however you’d like to. Better management equals better results.
Two traders, Joe Smo and Rick Moe can start a Forex account with the same amount of capital, enter the same trades at the same time, and have completely different return on investments based on how they managed their open positions.
If Joe and Rick both go long on the USD/JPY at the same time, with 3 lots, one could close the trade with a $1500 loss, while the other closes with a $1500 win. Their success depends on how they managed their trade. Your success depends on how you manage your trades.
Since trade management is so important, a plan must be established. Just as you need plans on how you will enter a trade, you must have a plan stating exactly how you will manage a trade.
This means that you should know when you will exit a trade before you enter one.
This means that you should know if you will stick with a hard profit target or implement a trailing stop.
Will you add to your position if it is winning? How much will you add?
Your trade management system plans everything out ahead of time so that you will not make emotional decisions during a trade. Emotional decisions may turn out profitable here and there, but they will almost inevitably hurt you in the long-term. Making emotional trade decisions leads to a weak foundation for your “wealth house”. Stick to your plan. If it proves itself to be unsuccessful, then create a new plan and test it, but do not be governed by your emotions.
Winston Churchill said it this way: “He who fails to plan is planning to fail”. Let’s position ourselves for success by creating a plan.
Trade Management ImplementationHere is the fun part: actually managing your trades.
Before you manage your trade, you have to enter it. A firmly established entry strategy needs to be in place before you move on to your trade management strategy. Whether your entry strategy is an EMA cross, a monthly candle’s close, or a daily break-out signal, knowing how you’ll manage the open trade is key. The “when” of entering and the “how” of managing encapsulates the majority of your trading experience.
Many people develop an entry strategy and then shoot from the hip.
“I’ll move this take profit now.”
“Should I move this stop loss to break even?”
“What should I do if it is 10 pips away from my target? Add?”
“Oh, this might work”.
Making emotionally based management decisions can be just as devastating as emotionally based entry decisions!
Establishing how you will manage open trades before they are open frees you. Answering the “what if this happens?” questions frees you to act when a circumstance arises because you are not wondering “WHAT DO I DO!?!”. You will already know what to do. You won’t have to spend your mental energy worrying, panicking, and frantically Googling “trade ideas” to figure out what to do. You will be prepared.
Preparation gives freedom not bondage.Once you are prepared, with a plan, it is now time to execute the plan. If you have a to-do list but never do it, it isn’t benefiting you much. If you have a plan and do not execute it, it isn’t benefiting you much!
If you don’t have one already, create a management plan today. It will be one of the fundamental parts of your Forex Trading System. Your trade management strategy plans everything out ahead of time so you are not making emotional decisions during the trade. Establishing this part of your Forex Trading System will create an environment where your capital can be protected and prosper.