By Martin Tillier
In social situations, when people find out that I make my living by trading and writing about markets, there is always a good number of people with a question or questions.I have a lot of sympathy for doctors who, when word gets around as to their profession, get besieged with descriptions of symptoms, many of which make the enjoyment of hors d’oeuvres a thing of the past.
While questions regarding financial markets have less of a stomach turning quality, they too can be impossible to answer without a detailed examination. “Should I buy stocks or bonds”, for example, can only be answered with a comprehensive knowledge of that person’s situation, goals and time horizon.
Over time, I have developed some glib responses to the more common inquiries. “Where is the stock market going?” will usually result in me giving one of two responses... Either “If I knew that for sure, I’d be on my personal Caribbean island rather than here talking to you...” or the more succinct, but also more accurate, “Up and down”.
One of the unanswerable questions for which I have yet to develop a smart-mouthed response is “If I am new to trading, how long should I run a position?” The obvious, if somewhat uninformative response is “It depends”. The problem is it depends on more factors than I wish to explain in cocktail party chatter.
The fact is, though, that for many who are relatively new to trading, this is a valid and vexing question. If you have traded for a while, I am sure you have, at some time, placed a trade that initially went your way, only to see the market turn and have it end up as a loss. If so I am equally sure you told yourself that you ran that one too long. Similarly, we have all cut for a loss then seen the market bounce back, or taken a profit just before the real move got underway.
Subscribers to my Forex Insider course will be aware that I preach the value of setting exit levels, both for a profit and loss, at the time a trade is placed. Herein lies the answer to the question, “How long should I run a position?”
By setting levels at the time a trade is initiated -- and sticking to them -- you can remove the emotion from the decision of when to close out. Trading without emotion is difficult at first, but is an essential skill to acquire if you are to consistently make money from financial markets.
Thus, the question of how long you should run a position in terms of hours or days becomes irrelevant. You simply run it until your level is reached. As to where you set those levels, it is really a function of several things.
Firstly, the volatility of the market at the time; in volatile markets you need to give room for some swings when establishing a stop loss, but your target profit level will be correspondingly further away.
Secondly, your position size; the target should always be further away than the stop level, but the potential loss should never be more than you can bear with a shrug. This is an essential part of taking the good and the bad with equanimity.
Thirdly, the original intention of the trade should be taken into consideration. If it is a long term trade, looking to profit from a fundamental shift in relative values, you will be looking for a big move over time, and will therefore be running the position for a significantly longer time than a normal range or breakout trade.
Fourth, and most importantly, those levels should be based on previously established points of support and resistance. Stop-loss orders are best used to protect against a break through these levels (just below support and above resistance), while targets should be just inside them.
As you gain experience, you realize that, while establishing exit points comes under the “best practices” banner, the actual price at which you cut is somewhat flexible. If the picture changes in any way, either from news that affects the price, or if time changes the look of the chart, then you have to make adjustments.
Believe me, with experience this becomes second nature. For those learning to trade, however, the basic answer is “As long as you intended to in the first place”.
Having a plan and sticking to it is what those paid to trade within the market do every day. You should too. Oh, and if you ever see me at a party, keep the conversation limited to sports, the weather and such. Thanks!
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Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
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