Managing a Trade

Once you've "pulled the trigger" an order will be sent to the exchange and in a short time will be filled (- problems with getting fills at the right time and price and the intricacies of order routing will not be discussed here, the bottom line is, if you aren't getting filled at good prices, you find another broker) - you've now made a trade, which you intend to make a profit on.

This section could also be entitled - "When to Get Out" - and it is this, possibly more than anything else, which determines your success or lack thereof.

To begin with, your trade, any trade, all trades, will be running a loss since you've paid the brokerage their commission and the market maker his spread - a trade you make which you've made immediate money on is called an "arbitrage", i.e. free money, and is an unlikely occurrence for the retail investor / private trader - so we're going to let it run and close it later, hopefully in profit.

There is a notional "closing time" for any trade - for options we have a hard expiry date, but it is likely we will close out before that, but not necessarily all that long before; we can say for sure that the following will happen while our trade is open -

  • The underlying price will wobble around a bit - up and down and up and down, and
  • There will be some kind of "event" which occurs - this will likely cause a "jump" in the underlying price; and perhaps more than one; you should get an idea of what this could be by (- to begin with) simply reading the news files and using the old grey matter, i.e. your noggin, your bonce, your brain, never mind the AI, try some HI (- human intelligence)

Thus your position is going to fluctuate, perhaps wildy, and at each moment you are watching it, and it is hard NOT to watch your trading position when there is real money involved - you will be saying to yourself, what should I do?

  • Let it run
  • Hold fast
  • Take the money and run
  • Cut the rope!

- it's a real quandary! And then there is the "Sod's Law" aspect to it all - as soon as you close out that losing, "dog" of a trade, some good news comes in and it wanders into profit; or conversely, the lovely juicy profit you were looking at, but wouldn't take because you were greedy for more, is wiped out totally within a minute ... oh shit!

Somewhere between hysterical panic and stonewall calm is the promised land, of zen-like profit ...

Of course making tricky decisions doesn't help if your information is poor, and with most trading platforms you feel like you are flying blind with broken instruments in a thunderstorm. Where the hell are we going!

StockWave allows management of the trade by its alarm system; principally every trade gets a trade alarm which shows you on the chart itself, the red and green regions - the zones of danger and of "on-track"; it also tells you your current position, the expected return, the maximum profit and loss, plus the probability of profit.

With this information you can work out your exit strategy, for example if in profit and it is better than expected, close enough to your profit target, then closing out makes sense - take the cash, don't be greedy; if a trade is not doing so well, if the loss isn't too bad and there's plent time left, let it ride, or if its doing horribly, moving the wrong way with a backdrop of negative sentiment, maybe you should just take the hit ...

These are "fuzzy" notions but can be made rigorous - options trades sometimes have capped loss or profits which set maximums for you, or if not you can think of the "equivalent share position"; suppose 1 option contract is 100 shares, you are dealing 10 contracts per trade and the underlying stock is about $30, then you are really "playing" with about $30000. If you were dealing the shares, what would be an acceptable profit target for you - maybe 5%, which is $1500; if that is your target level and your option trade is up $960 then you should probably take and be grateful for the profit. And vice versa for your stop losses.

Anecdotally, the people who are good at this option trading business and make money in practice make lots of small but tolerable losses, some small profits, but with a handful of big profit trades; they may actually lose more often than they win, but some of the wins are big. Keeping the losses small is primarily a matter of judgement and discipline. Another piece of advice I've heard is "never try to repair a bad trade".

StockWave also has two more types of alarms, one for news and one for price spikes and can notify you by email.