Follow Your Rules, No Exceptions?
Take Your Profits Or Let Them Ride?
Here's how you can complement your money management strategy with your trading system.
Practical trading advice often takes us in conflicting directions. For instance, when we are in a profitable position, should we take our profits or let them ride? Most articles on money management encourage the reader to adopt rigid standards, such as offsetting a position before a small loss turns into a large one. Money management rules are to be taken seriously. However, they do not apply across all market conditions, nor should they hamper your opportunity to take advantage of current trading opportunities.
PREPARING FOR THE TRADING DAY AHEAD
Individuals perform differently throughout the trading day. Some investors are better off trading in the premarket, while others are more effective after the choppiness in the early morning subsides. For many active investors, as the day continues, it becomes easier for them to perceive discernible chart patterns. For them, it is better to see what has already taken place in order to determine what might occur throughout the afternoon.
Similar to a thoroughbred racehorse, the market bolts from the gate at the ringing of the opening bell. Riders are instinctively jockeying for position as they approach the first turn, but once they hit the backstretch, the horses settle into a more relaxing pace.
Since the opening hour of trading accounts for 20.83% of the daily trading volume, this volatility is more likely to throw daytraders off their game plan.
FIGURE 1: THE 20-DAY SIMPLE MOVING AVERAGE DETERMINES THE TRADING SIGNAL. Different money management tactics are required, depending on whether the red (signal) line is above or below the black (price) line.After I present a new trading system, I will discuss how to create money management guidelines specific to making trading decisions using this premarket moving average interaction (PMAI) system.
...Continued in the August issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the August 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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