Be Adaptive if You Want to Capture Profits

How you get into a trade is far less important than how you get out. It doesn’t matter if you picked the exact bottom of a market if you don’t have a good exit strategy.

When it comes to managing a trade, you have two choices. The first is passive management. This is where once you place your trade, you walk away from it.

Your trade will either reach your target for a nice gain or you will take a loss. This is a great option for busy traders who don’t have the time to watch the market throughout the day.

The second option is active management. As its name implies, this style of trade management is best for traders who are able to keep both eyes on the market.

When actively managing a trade, you’ll be able to quickly adjust your exposure based on what happens in the market in real time. For example, you might trail a stop loss, take partial profits, or close your trade entirely because of what’s happening in the market right now.

My own trading tends to lean towards active management more often than not. A great example of this is the opportunity readers were presented with on August 30. In that issue of Market Minute, I pointed out that the Energy Select Sector ETF (XLE) was getting ready to break out again.

The issue concluded by stating that the target for this trade was $94. But last Friday, something happened. And it’s changed how we should manage the trade. XLE did indeed break out, but in doing so quickly reached overbought conditions.

You can see this below on a 4-hour chart of XLE.

Now that XLE is less than $3 away from its target, the risk-to-reward equation is starting to skew to the downside. In other words, the odds of a bearish reversal here are getting higher. It’s in situations like these where it might make sense to employ some kind of active management strategy.

It wouldn’t make sense to do nothing and let all the gains from the trade go to waste. On the other hand, it’s still possible that XLE could reach its original target of $94. To split the difference, you could take partial profits from the trade. Alternatively, you could trail your stop loss higher to lock in a gain.

Either one of these options would ensure that you won’t walk away from this trade empty-handed.

Happy trading,

Imre Gams

Do you manage your trades more passively or more actively?

Let us know your thoughts – and any questions you have – at [email protected].