A common question I receive during nearly every class I teach is, “What if I notice that the trade isn’t working out? Should I wait for my stop to be hit or can I exit from the trade sooner?”
Getting into trades seems to be very easy. All too often, traders will enter into positions with minimal analysis performed beforehand. Online Trading Academy graduates know that before any position is opened, you should know the entry price, the target price, and most importantly, the stop loss price. We need to identify all three components of our trade before we have emotion attached to our money in the markets.
Minimizing our emotions while we are trading is critical. Emotions cloud our judgment and force us to exit positions too soon or too late. The other part to proper trade planning is to identify both positive and negative factors for our trade before we enter it. Once again, we will be more objective prior to putting our capital at risk.
We do this on our Pro Picks as well. For those of you who may not be familiar with Pro Picks, a team of Online Trading Academy instructors identifies several trading opportunities for educational purposes every day. Looking at a recent pick, you can see that they also identified positives and negatives for the trade. A negative factor may lead a trader to reduce their exposure in the trade with smaller share size or waiting for additional confirmation before entry.
Getting back to the initial question of whether a trader should wait for a stop to be triggered or exit the trade earlier. This is tricky. As traders, we should stick to our plans and allow the stop to trigger our exit when the trade is not working in our favor. Since we have identified any negative factors for our trade before entry we should not ignore them if they begin to present themselves while we are in a trade.
When I enter a trade, I constantly ask myself if there is any reason why I should exit (i.e., stop triggered, trend breaking, news coming out, etc.). I do not want to scare myself out of a position but rather want to realistically evaluate the negative factors effecting my position. When I enter a trade, price should start to move in my favor rather quickly. The longer the price lingers in my supply or demand zone after entry, the weaker that zone actually is and the less likely I will be to profit from the trade.
Trading is all about protection of capital. If there is a legitimate reason to exit a trade before a stop is triggered or a target is reached, then I am not opposed to doing so. But if you have not identified the negative factors or are following your fear instead of logic, then you need to stay away from your open positions and allow your plan to work.