The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies

CHAPTER 8

Trade Management

Choices are the hinges of destiny.

—Pythagoras

Trade management is what you do after you get into the trade. These decisions are complicated because they deal both with mathematical realities and with trader psychology. One thing that you’ll often hear is that it’s your responsibility, as the trader, to find your own right way to trade. The implication is that basically anything works; you just have to make some choices from the giant menu of possibilities, experiment until they feel right, and then stick with them. There is some truth here, in that any rule set must be matched to the trader’s personality and psychological makeup, but there is also a very important point that goes unsaid: it is exceedingly difficult to find an edge in the market. You must understand the impact of every decision and every adjustment.

Consider the simple case of a specific trading pattern that has an edge in predicting a small directional movement over the next few bars. Traders A and B decide to trade this pattern, but they both realize the importance of adapting it to their personalities. Let’s simplify the problem they face, and consider only the choices in exiting at a profit and exiting at a loss, and furthermore restrict the options for those two conditions to “large” and “small.” If we were trading our theoretical random walk market, these choices would not matter because the probability of winning would adjust to maintain zero expectancy (remember, no edge is ever ...