Every successful trade follows a clear progression, from identifying entry points to deciding when to take profits or exit. Managing trades effectively requires a structured process, a keen awareness of market conditions, and an ability to adapt as a stock progresses through its cycle. This lesson outlines the key stages of managing a trade and the thought process behind each decision, helping you navigate trades with confidence and discipline.

The Step-by-Step Process of Managing a Trade

Setting the Max Pain Stop-Loss

• What It Is: Place your initial stop-loss just below the base or consolidation shelf
• Why It Matters: This level defines the maximum risk you’re willing to take and helps determine your position size

Adjusting Stops as the Breakout Progresses

• Breakout Day Low: Once the breakout gains momentum, move your stop to the low of the breakout day
• Break Even: As the trade moves further in your favor, adjust your stop to breakeven to eliminate risk

Evaluating Trade Objectives

• Ask Yourself: Is this a short-term cashflow trade or a longer-term position out of a sound base?
  • Cashflow Trades: Sell into strength on day three or four, taking advantage of near-term extensions
  • Base Breakouts: Be more patient, allowing the stock to build momentum for a larger move

Why This Matters: Understanding your objective at the outset prevents emotional decision-making during the trade.

Raising Stops as the Trend Develops

• As the stock reconfirms higher prices, raise your stop-loss below consolidations
• Be reasonable—don’t tighten stops so much that you risk getting shaken out prematurely

Listening to the Stock’s Personality

• What Is It Telling You?
  • Is it respecting the 10-day EMA consistently?
  • Is it a high flyer riding the 5-day EMA?
  • Is it slower-moving, like Apple, requiring patience as it rests along the 20-day EMA?

Key Questions as the Trend Progresses

Where Are We in the Market Cycle?

• Is the broader market in the early, middle, or late stage of its cycle?
• Are you trading aggressively when the market is strong or cautiously during signs of weakness?

Has a Trendline Developed?

• Look for trendlines with at least two to three touches. Don’t force them—if a trendline isn’t clear, it may not exist yet

Are We Getting Extended from Key Moving Averages?

• 10-Week EMA: If the stock is significantly extended, it may be time to take partial profits
• Daily Chart Extensions: Look for second extensions from the 10-day EMA as an opportunity to sell some shares into strength

Recognizing the End of the Trend

Changes in Stock Character

• A stock that respected the 20-day EMA now respects the faster 5-day EMA, signaling acceleration
• What It Means: The stock may be nearing the end of its move as buying pressure intensifies for a final “blow-off” phase

Key Sell Signals

• Loss of a respected moving average (e.g., the 10-day or 20-day EMA)
• Breach of a well-established trendline

Wedge Drops as a Last Line of Defense

• If you miss other sell signals, the wedge drop—a sharp, decisive breakdown—can act as a final warning to exit the trade

Embracing Corrections

Corrections are not the enemy. They are necessary resets that:

• Allow leading stocks to consolidate and set up new bases
• Create opportunities to identify the next batch of market leaders

Key Advice: Don’t ride corrections down. Sitting in cash during these periods can prepare you to capitalize on the next big move.

Practical Example

1. Entry and Stop-Loss: Enter a breakout with a stop below the consolidation shelf
2. Raising Stops: Move the stop to breakeven after follow-through
3. Evaluating Extensions: If the stock is extended from the 10-week EMA and shows a second daily extension, sell partials into strength
4. Final Exit: Exit the remaining position on a breach of the 10-day EMA or trendline