You've followed all the proper guidelines before pulling the trigger on a particular trade. You've watched carefully for signals that have worked for you in previous trades. You've waited for the price and volatilities to come to you. You've waited for the right number of days until expiration before entering. You've done all the things that have worked well for you in the past. So you enter the position feeling that you have all the bases covered.
Timing can be everything.
Even though you've done all the things that have worked for you in the past, you just think you were wrong this time. Or, you may think that some master market manipulator was just lurking, waiting for you to enter your position, so they could pull the rug out from under your trade. Take your pick of any wide variety of reasons a trade just “goes bad”.
What to do if you find yourself caught in that situation?
What should you do if you find yourself in the situation where the trade goes against you from the onset? At the very least, consider restructuring your position so that you reduce risk, especially if you new to trading. If you are an experienced trader but unable to watch the position closely during the market hours, consider taking off some, or all, of the position. Choose adjustments that reduce the amount of risk in the trade rather than adding to it. If your maximum loss is hit, choices available to you at that time become very limited so take appropriate action before you are in that dire of a situation.
If you find yourself in market action you didn't expect, then you may be stuck with a position that you would never have entered under those conditions. It may be best to just take your lumps and exit the position. That decision can only be made by you.
You've decided to remain in the position rather than exit, now what?
If you've made your decision to stay in the trade, you may want to consider the following courses of action:
- Decide if you are going to adjust earlier than your normal adjustment triggers. Early adjustments often result in less costly adjustments. However, the risk of making premature adjustments is that the adjustment may not have been needed if you had waited until your usual adjustment time.
- Rather than adjusting early, decide if you are going to give the market time to play itself out. Sometimes that can be the better tactic. On the other hand, that may also result in adjustments that are so expensive they destroy the position or losses build up so that you are forced to exit.
Each tactic has its pros and cons. What is important is to decide what course of action you will take before your trade is in serious trouble, and follow your plan. Whichever route you take, choose adjustments that remove rather than add risk, as mentioned earlier in this article.
By making the decision to stay in the position, it is critical to have a plan that encompasses cutting your losses. If you are unable to incorporate this crucial element into your trade plan for your particular trade, then it's time to exit.
In summary, it happens to every trader at some point – the timing just doesn't work out. If it hasn't yet happened to you, it is inevitable that you will experience a “trade gone bad”. Don't take it personally, it's all part of trading. The point of this article is that entering a trade that starts going wrong right away isn't quite the same as getting your foot caught in a moving subway car door. You can get out of your trade if it's moving against you and sometimes, that is the best decision you can make. Don't let your emotions keep you in a trade that has “gone bad”; the best adjustment may be to exit.
I hope this article is helpful in planning your trade adjustments, or exits. Feel free to add a comment below.