In this CFD tutorial I wanted to walk through the concept of re-entry. A lot of traders will get stopped out of a trade many times and simply believe the trade is over. Its what you do after you get stopped out that determines the success of the trade. For this reason I wanted to discuss the idea of re-entry.
Let’s use the example of a trader trying to pick the ‘top’ of an overbought stock. Let’s say we are watching a highly speculative stock that rallies and the trader simply tries to pick the pivot point or the top of the rally and make some money from a correction as the market realises its overvalued.
Instead of simply having one attempt at picking the top and that it. Instead a re-entry strategy should be employed. Here we would start to enter the market believing it has picked but placing very tight stop losses in case the market still rallies quite strongly. This creates a scenario where the profits from picking the pivot point or top of the market will far outweigh the half a dozen of so small losses we gathered along the way.
It’s the realisation that when you are stopped out the trade is not necessarily over. A large number of trades are usually correct its just timing on the traders behalf can be off. Re-entry can help re adjust timing of the trade so as an opportunity is not missed.
Running According To Plan
A money/risk management system is only as strong as its user. This means that having a trading plan is imperative and moreover sticking to it is even more important. This is one of the hardest disciplines for a trader. Whilst they may have a foolproof plan in place if they don’t stick to it that is when things tend to go wrong.
One of the most common problems a lot of traders come across is when they find that their system is giving them stops that are constantly getting hit. In this instance perhaps the system you trade should be re – examined, this is no reason now to remove the stop. If you remove the stop how will you determine where you place the new stop price? Second guessing only brings about more risk. If this is the case and new systems are to be tested or you believe you should move stops further away to cater for more volatile trading bands then simply reduce position size to move stops further away to minimise your risk levels. This is a common practice used by many traders and the risk levels stay the same because stopped whilst being moved further away their position size is reduced to cater for this so risk levels remain steady!
Be Wary of Vices/Distractions
Every trader needs to weary of their surrounding when trading. Your trading environment need to be conducive to trading. Fatigue, boredom, kids, confidence are just to mention a few. There are many factors one needs to consider before attempting to trade properly. Distraction can cost money if you are ill prepared.