It’s not as funny as the scene from Forgetting Sarah Marshal (a movie I don’t recommend), but the line should be learned by every trader. Once a decision has been made to enter a trade, the exit plan should already be well in place. Between the entry and the exit, do nothing… No, do less.
There are circumstances for changing the original plan, but even those decisions should follow a plan. Rules should cover:
- When to tighten a stop?
- When to take profits or partial profits?
- When to increase a position?
- When is new information important enough to change the plan?
The answers should be consistent with the original trade idea. Therefore, as an example, if you have chosen a mean-reverting trade, you should probably never increase your position, but only decrease it by taking profits. That’s because mean-reversion is often a short-term trade of only a few days. A breakout trade, in expectations of a trend developing, would have a different history and adding to it is often reasonable (i.e., after a pullback of a few days, in smaller amounts than the original positions, etc.). There are lots of different strategies for these and I will covered them in future posts.