Everyone knows that in trading you need to ride the winner and cut the loser.
But in reality how to really do it?
Most people would exit a good trend way too early and seeing it rally much higher later.
I use 2 key elements below to help me to ride a good trend.
1. Risk management
2. Big picture
By understanding the 2 key elements in a trade, it helps me to ride the trend as much as possible.
Risk management is still the top priority in entering any trade, position sizing and stop loss. That is the maximum that i will lose if i’m wrong. My risk is already taken care of.
So what if i’m correct, how much profit can i ride? There are many methods to this, most people use risk/reward ratio at support or resistance zone or indicator, for example risk/reward of 1/2 or RSI at overbought/oversold level. That is fine, but in my view it can be better managed.
Why? Simply because by setting fix risk/reward rule or following indicator it limits your profit potential, you will never know how much the market will give you. In most trend trading textbook, one of the rule is trend trader never catch bottom or top, but just ride the trend as long as possible.
By understanding the big picture of the market or product you are trading, your thinking will be aligned with your trade. If the trade is moving in your favor consistently and risk has been taken care of, is there any reason to exit the trade now? By keeping the big picture in my mind, it helped me from exiting good trade prematurely.
This article will not talk about how to take profit as it’s another topic altogether. There are many methods as well, such as trailing stop, partial profit taking, moving average crossover, etc.
One example that i recalled is NIKKEI 225 chart from Nov 2012 to May 2013, a 70% rally in about 6 months. This is definitely a very good trend!
The big rally really got me fascinated about the concept of “riding the winner”.
Assuming if you got in at the horizontal breakout level in late Nov 2012, where would you exit? 10000? 11000? 12000? or 13000? How do you ride this trend?
Ultimately the market gives more than 6000 pts profit in that 6 months, and still uptrending as of now.
This is a good question to think about by understanding the 2 elements above.
Hope you benefit from my sharing.