What To Do When A Trade Moves Against Us
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When I set up a trade they are designed to be set up as the premium paid is your risk. There are no stops on these trades. So when entering the trade decide what you are willing to lose per trade and that is what you purchase in option premium.
So for example, if one are willing to risk 5% of their trading account value on a particular trade then they simply purchase that amount of options. So there is a $10,000 trading account and the risk 5% per trade then one would purchase $500 of option premium. If the option is trading for $1 then it will cost $100 per contract and there would be a purchase 5 contracts.
If the trade moves against us initially there is nothing to do. There is no stop-out level and we simply hold the position until either it expires at $0 out of the money OR it turns around and gets profitable again.
If the trade moves in our direction initially then we manage the trade using our EW guidelines and protect our profits along the way cautiously at which point I will provide guidance and updates. Typically when we get to around 100% profit I will become more cautious as this is typically where we run into a key pivot level and at that point will need to decide based on a number of factors whether to take profits or let things run.
Those are the simple and basic rules and I set the system up this way for a reason and based it on my many years of observing how the market reacts within our EW and fib pinball system.
Where I think people are getting confused is when the trade may initially go against us and not see immediate follow-through. This happens a lot and is very common and in fact a large percentage of our trades will start out this way. It does not mean that the trade will not ultimately work out.
Remember when we are dealing with EW we are dealing in probabilities as well as counts on multiple timeframes. So I may set up a trade using the best-case scenario with the primary count that is looking in a particular direction only to see that cont not follow through initially. There will however still be a valid alternate count that is pointing in the same direction that simply will need a bit more time to work itself out.
Most of the time I try to give enough time on the options to allow for this. This is why I do not use stops on these setups. Because we have been dealing with very sloppy and corrective wave action over the past several years we have seen this occur quite frequently and again a trade moving against us initially is not uncommon. I am not going to be able to layout every single alternate count that is possible as I have to choose what I view as the most likely. As the market moves then this will change and I will adapt and update the charts as I see them. But as far as the trade is concerned it really does not affect anything because the risk is defined ahead of time and if the trade moves against me again it simply does not matter as there is no stop.
