Know Your Trade

There are so many trading axioms out there such as "the trend is your friend", "don't pick tops and bottoms", "never catch a falling knife", "never short a dull market", "never add to a losing position", and the list goes on. Now, there's nothing wrong with these rules but in my experience, almost all of them can be broken in certain market conditions. The last rule on Dennis Gartman's 22 Rules of Trading states: "All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!", and that couldn't be more true.

So, you can break the rules but only if you know that you're breaking the rules, which brings us to the point of this post: Know Your Trade! Know exactly what type of trade you're in. There's nothing wrong with "catching a falling knife" as long as you know you're catching a falling knife and then manage risk accordingly, i.e. you don't continue to add to the losing trade. Same goes for picking tops and bottoms -- nothing wrong with it, as long as you know you're attempting to pick a top or bottom. Once you know and acknowledge the type of trade you're taking, you can then proceed to manage that trade accordingly. For example, how I manage a Trend Trade differs from how I manage a Counter-Trend trade. My risk management is tighter on counter-trend trades because my reason for getting in the trade may be exhaustion at a Resistance Area, and if we get continuation beyond the high of the move, then obviously we haven't reached an exhaustion point yet and I should take a small loss and re-enter at a more favorable price. If I'm taking a trade in direction of Trend within the Context of a Trend Day, I may actually add to the "losing" position if price moves against me by a few ticks as long as everything else still supports my trade idea and my original stop-loss level isn't threatened.

In conclusion, just be honest with yourself. Know what type of trade you're in, and then have a plan for managing each type of trade. If you can't identify the type of trade you're about to take, it's probably a good idea to skip that trade because you're obviously confused on the trade idea from the get-go, and won't have the conviction to see the trade through. I hope you find this helpful, and as always, I welcome your insights on this topic.