What is trade management? Let’s learn in this post, so next time you will be more prepared than everyone else.
Before placing every trade, you should define your maximum
risk, maximum return, and breakeven points, as well as an exit strategy
depending on whether the position is profitable or not. Taking such procedures
prior to entering the transaction allows you to assess the risk, quantify it,
and build a plan to control it. Trade management also includes dealing with
risk in your trades and portfolio as a whole, as well as your overall trading
strategy.
Chess & Trading
The analogy of chess is the best way to convey the subject
of trade management. The first step in developing your chess game is to study
opening strategies, which are precise sets of movements employed at the start
of a chess game to establish a specific offensive or defensive pattern.
Beginners should practise the techniques and memorise the patterns. They learn
several combinations of the openings so that they can adapt if the moves do not
occur in the order that they have memorised. Chess openings typically last
about 10 moves but set the tone for the entire game. You will have a strong
defensive position from which to strike and take the edge if you can develop a
decent position through correct usage of an opening strategy.
The issue is that most beginning chess players are just
concerned with memorising the moves. They examine the image of where the pieces
should be at the end of the opening stage and work to get their pieces in the
same place. They simply study mechanics and hence move mechanically without
thinking. Their analysis is limited on the next step, and they do not consider
the big picture. Chess is a strategic and concentration game, as opposed to
checkers, where both players just respond from one move to the next. What the
novice overlooks is that each opening plan has its own theme. For example,
focuses on establishing a strong offensive position in the centre of the board,
whereas another focuses on establishing a strong defensive position.
Each opening is more than just a set of mechanical
movements. To be successful in implementing each opening technique, you must
first understand the concept of the opener. What is the purpose of the opening?
Understanding the topic will force you to play with a goal in mind, rather than
just plain mechanical moves. You can carry out your strategy regardless of what
your opponent does as long as you understand the general concept. Even if your
opponent responds unexpectedly, You can still keep to your general plan and
alter as needed. Each move will be done in the context of the opening strategy,
and you will be able to execute your strategy calmly.
Options Trading, how its Relevant to Chess?
What does this have to do with option trading and trade
management? Many beginning traders, like chess beginners, are solely concerned
with the mechanics of trading. They research option methods and focus on how to
initiate and close positions, becoming mechanical traders. Every trade, though,
has a central subject. There is an overarching theme to your investment when
you choose a stock to invest in. You have done research and analysis on the
security and produced a prediction or assumption regarding the direction you
expect the stock to move and how long you believe it will take.
Another mistake that inexperienced chess players make when
selecting a suitable opening strategy is failing to select the plan that best
represents their playing style. Players with an attacking approach, for
example, should not adopt a passive defensive opening strategy. If they do,
they will attempt to make attacking moves from a position that was not designed
for such plays, weakening their position and opening themselves exposed to
destroying counterattacks. This mistake is frequently committed when players
fail to match the concept or general strategy of the opening they chose with
their playing style, instead focusing solely on the mechanical movements. In
this regard, the difference between chess players and chess professionals is
that experts understand the theme as well as the strengths and weaknesses of
the opening they choose, as well as the strengths and weaknesses of their own
playing style, and they focus all of their movements on executing that approach.
How to Develop a Trading Plan?
To create a trading plan or theme, you must first choose
your trading objectives. Most investors simply state that their goal is to
generate money. However, this is an overly general goal, similar to chess
players just stating that they want to win the game. The more specific goal
focuses on how you want to create money. Do you want to make money by buying
stock, shorting stock, buying calls and puts, selling options, using spreads,
nondirectional strategies, high-risk or low-risk strategies, picking specific
stocks or sectors, trading volatility, picking only one strategy or several
strategies, focusing solely on indexes (but which ones? ), and so forth? As you
can see, there are several answers to the topic of how you want to generate
your money, which may be rather difficult to a trader with so many investment
options to pick from.
Chess players are recommended to choose the openings that
best suit their playing style when researching openings. With an almost
infinite number of opening strategies to choose from, you'll have no trouble
finding one that suits your playing style: conservative, aggressive, offensive,
defensive, direct attacking, flank attacking, gradual development, quick
development, and so on. Investors must go through the same procedure. Traders
must select their trading style as well as their risk tolerance.
Know Yourself
The most crucial stage in developing an effective trade
management system is self-assessment.
Sun Tzu remarked in
The Art of War, the classic book on strategy,
"If you know the enemy and know yourself, you need
not fear the outcome of a hundred battles."
When it comes to investments, the enemy is market
unpredictability, and every trade is a struggle. Knowing yourself entails
making an effort to categorise your trading style. Are you a cautious or
aggressive investor? Is your timetable short or long term? Do you want to focus
on a diverse range of industries or indices, or just a few handpicked stocks? If
you study and research the market and know your own trading style, you won't be
afraid of the outcome of a hundred battles (trades). You will be able to match
your trading style to the appropriate investment options. Although you will not
win every battle, if you always trade inside your style, your wins will outnumber
your losses.
If you do not understand your trading style, you will simply
follow the crowd and invest haphazardly. You will trade without conviction and
be influenced by market volatility. Worst of all, you will seek trading ideas
from any source rather than generating them on your own. This generally leads
to the invalid advice being followed. You will never understand what causes
your losing trades to fail and your winning trades to profit, and your luck
will run out because there is no expertise involved while trading blindly.
Once you've discovered your trading style, you can create an
appropriate trading theme to match it, just as chess experts choose an opening
theme to match their playing style. Then you'll have a better idea of what
trade chances to look for.
In short trade management is all about, knowing yourself, Strategy
that suits you, Position sizing, your psychology, your style, Risk reward ratio.
Happy Investing & Trading
The ValuePlusOptions Team
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