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What It Means to Manage Trades


For every one you enter, you must have a plan.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

One of the most frequent questions I get is, "What do you mean when you say you are managing a trade?" The simple answer is this: Once you take a position in the markets, you're in the realm of risk, and it's your responsibility to embrace and manage the risk. Novice traders may not entirely appreciate this concept. The simple way of saying this is that it's critical to plan the trade and then trade the plan.

On March 1, I alerted readers that Research in Motion (RIMM) was my "Stock On Radar" for the week. During the previous four weeks, Research in Motion displayed good relative strength to the broad market.

I determined that if Research in Motion could break through the 72.00 area on volume, it could have some 15% upside before running into resistance.

I set a trigger buy stop at 72.25 with a stop at 68.99 and a potential target in the $83.00 area. This is what the chart looked like at the time:

Click to enlarge

Six trading days later, the Research in Motion trade triggered at 72.25. I entered and began to manage the trade:

Click to enlarge

You may read a lot of words about what exactly it means to "manage" a trade, but perhaps not see it described on a chart. If a picture is worth a thousand words, then the chart below speaks for itself.

Click to enlarge

When you enter any trade, you must have a plan for managing it. If the trade goes in your favor, you control risk by taking partial profits and raising stops. As you can see, I sold one-third of the position at the 76.16 area and raised the stop to 71.49. This brought the cost of the purchase to below 71.00. At this point, I essentially have a "free trade."

Presently, I'm holding the remaining two-thirds of my initial position and watching for the next opportunity.
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Position in RIMM.
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