The Hardest Thing about Trading is . . .

So you sell a vertical spread, you sell a spread far out of the money above a near term resistance. Everything is on your side, price and probabilities. Then, without warning, the stock jumps right through resistance and through your short strike. You start sweating, your palms get clammy . . . and you say to yourself, among other things . . . "Now what do I do??!!!"

I firmly believe that it's easy to enter a trade but hard to manage it over time. If you have been trading in the market for 20 years or 20 days and whether it's long stock or a Double Diagonal, the statement holds true.

Below are four things to consider if a trade doesn't go your way:

1- Close it out and take the loss. Admit you're wrong, take the loss and move on. If you position size appropriately, plan for the worst as far as risk goes; this shouldn't be a big deal.

2- Hold on and play the probabilities. If you enter the trade as a High Probability trade and you position size correctly, just sit back relax and see what happens. Too often people exit trades early only to have the spread come right back into the profitability zone. Relax, kick your feet up and find a good ball game to watch!

3- Adjust with other trades or instruments. I posted an article here on the Daily Swim entitled "Why you Have to Love Being a Trader" (March 9th). In that post there are a few ideas of types of adjustments/hedges you can make. As you do adjust with another trade or instrument, follow these guidelines:

a. Adjust only 30 - 40% of your position so you don't lose on the original trade, and the new trade. The whole idea of adjusting is to reduce your risk, not to change a losing trade into a winning trade.
b. Would you enter the trade today independent of the trade you're adjusting against? If the answer is yes, proceed, if not consider something else.

4- Adjust the trade into a trade with a better chance of winning. This is the one that traders covet the most, taking a loser and turning it into a winner. This is also the hardest thing to do. Here are some questions to ask as you embark on turning a loser into a winner

a. Would I enter this new trade independent today of what I have on?
b. What kind of risk am I adding to the position?
c. Does it actually increase my probability of making money?

If you answer "yes" to any of the questions above, then go for it; if not, consider another option.

Trade Smart, Trade Profitable.

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