Absolute Top

Is your trade a dud or a dude?

Amex black cardThere are three ways of being active in the markets

  • Having a trade in play
  • Having an entry order
  • Standing aside

The first, and most obvious, is to have a trade in play. Clearly there is no disputing the fact that you are in the markets if you have an open position.

The second, and less obvious, is having an entry order waiting to be triggered. You are still active as your trade will be entered just as soon as the market conditions are met.

And the final, and not obvious at all to many new traders, is to be standing aside and waiting for market conditions to be in your favour. Standing aside is indeed a position – you have concluded that there are no trades available which meet your criteria.

With each of these three option you have to ask yourself: is my trade a dud or a dude?

Option 1: Trade in play

Never second-guess your open positions. Provided you trade was entered with due diligence then it is a good trade. It may not turn out to be a profitable one as you have no control over price action. Technical analysis is a probabilities game – however textbook the set-up there is no guarantee of success.

So, regardless of outcome, this is a dude trade.

You will have a stop in place. If price retraces too far you will be stopped out. Never manually close a position.

TDT Tip: Never be panicked into closing a position manually. The stop loss aspect of your strategy should be set before you enter the trade and you must stick to it. Your stop loss should be designed to give price room to breathe but at the same time protect you against price reversal.

If price moves in your favour you should trail the stop to protect your profits. Your stops should only ever be trailed closer to price action – never further away.

This type of trade becomes a super dude when price momentum dictates you can add to your position.

Option 2: Pending entry order

Having completed your analysis and finding a viable set-up you will place an entry order. This will be triggered once the market conditions are met.

TDT Tip: I am not alone in believing that the best way to physically enter a trade is via an entry order. Entry orders let you do your analysis at a time to suit you. You are able to calmly and rationally make your decision and place the order with a stop loss. The opposite is a market order, when you enter the markets live.

Once an entry order is in place, however, it may not be triggered for some time. The question here becomes: is the set-up still valid?

With an open trade you have to repeatedly check its progress and move your stops accordingly. The same is true with an entry order – it needs regular assessment.

First, check that the set-up is still viable. After the close of each subsequent bar ask yourself: if I were to analyse this afresh would I consider it a valid set-up?

Next, if the trade set-up is sound then check if the entry or stop loss need adjustment. This is likely to just be a few pips/points. If the market is experiencing a slight pullback or consolidation this may have to be done more than once.

TDT Tip: While you should never close a position manually a pending entry order can be adjusted if the market conditions have changed slightly (although not enough to invalidate the analysis).

Provided the set-up remains valid this is a dude (if pending) trade.

Some traders put a time limit on their pending orders but I don’t fully understand this – the set-up is either valid or it’s not. Some entry orders can sit with my broker for several days (sometimes a few weeks). Others I need to close off at the close of the next bar. If a trade has a good set-up then it’s worth the wait.

Option 3: Standing aside

Standing aside is a position. Never go looking for trades that aren’t there. Every trader should have a trading plan – a strategy for when to enter, how to manage and when to exit a trade. If the criteria are not met then you should not enter a trade.

Standing aside when there are no opportunities is a dude trade.

When traders enter into difficult price structured markets they are simply putting their capital at extreme risk – these are most definitely dud trades.

TDT Tip: Do not confuse ‘standing aside’ with ‘analysis paralysis’. Analysis paralysis usually occurs when too many chart indicators are being used by inexperienced traders. Half of them are saying to take a trade while the other half are saying not to. Keep your strategy simple. For more information on simplifying chart indicators see my article “Are your charts lit up like a Christmas tree?”.

In conclusion, a dud trade is one that is not well thought out. Entering on gut instinct, fiddling with open trades unnecessarily, and generally not sticking to the trading plan are all surefire ways of having only dud trades. This is not a professional approach to trading. It may make a little money short term but it is unlikely that someone would be able to stay in this game for long.

A dude trade is one that has been careful planned and executed. You are in trading for the long-haul – slow and steady wins the day. Follow your strategy rules and every trade you take will be a dude.

Good trend trading…

Anne Chapman

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