What Makes A Good Trade?

Man two trades I took recently are so important that I wanted to blog about it. First we need to ask ourselves what makes a good trade? For me it is mainly two things - Good Trade Selection and Good Trade Management. When a trade ends up as a losing trade, it could be because the setup was sub optimal to begin with. In that case, the problem lies with the trade selection. Other times, it could be because we didn't manage the trade properly. This could be mistakes like not observing stop loss, or leaving too much profits on the table etc. Now this brings me to the trades I took: Capitaretail China Trust and Frasers Centerpoint Trust. So here is my trade review on both:

Capitaretail China Trust

Capitaretail China Trust

Trade Selection - Stock in steady uptrend, broke out of multi year consolidation. Ample space for price to move. Entered based on breakout of mini triangle which was consolidating with low volume. Good choice, only thing that wasn't nice was the poor liquidity of the stock.

Trade Management - Prices initially broke out nicely but closed below the breakout level with a big bearish bar. Decided to cut out for a 0.3R loss. Good management, a genuine breakout shouldn't close back below the breakout level.

Frasers Centerpoint Trust

Frasers Centerpoint Trust

Trade Selection - Stock in stead uptrend, broke out of long consolidation. All time high so no resistance above at all. Vol pattern speaks of accumulation. Entered based on a breakout of the consolidation highs. Very good selection, can't find anything wrong with it at all.

Trade Management - Prices initially broke out nicely but then formed a giant two bar reversal. This is also a two day pin bar. I was contemplating to cut out if prices hit 1 tick below the bearish bar due to the sheer size of the bar, but decided to wait and observe how price would behave if it tests the breakout level. Prices shot through that level and showed no signs of rebounding, so I ended up cutting for a 0.5R loss. Trade management could have been better as I should have cut out at 2.03 when there were no signs of interested buyers for a long time. Instead I only cut out at 2.02 when prices pulled even deeper. Nevertheless, it was good that I didn't hold on to the trade and wait for a full bar loss, as prices subsequently dived even deeper.

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So my point is this - A losing trade is not a bad trade!! If after the trade we have no regrets about the way we chose and managed the trade, it is a good trade! A bad trade is one which has a sub optimal setup or one that is poorly managed. In this case I'm very happy with my Capitaretail China Trust trade, I would have taken it all over again and managed it exactly the same way. As for Frasers Centerpoint, I would also have taken it all over again, but I would have cut out at a higher price, so well the trade management was a little lacklustre.

In both cases, what if prices shot back up without me? Well, that is something I have to accept, and I'm totally willing to accept it. To me, a good breakout shouldn't go too deep back below the breakout level. Sure it may test it, but it shouldn't close below it or go too deep. That is my belief, and so my management strategy is based on that belief. Also, one could be wondering, why didn't I take partial profits for both trades? Well, this is because there was completely no reason to do so. Price wasn't at any trouble area, there was complete open space above, and I'm comfortable with pullbacks as that is a natural thing. Of course in hindsight taking partial profits would have worked out better, but again I have no regrets and would still have chosen to hold on to the full position all over again.

Am I sore about the losses? A little for sure, but I have totally no regrets in taking these small losses. In fact, the way I managed them is exactly in line with "keep your losses small". I had two losses but it only cost me 0.8R instead of 2R had I waited for full bar losses. This is something so essential that I learned from James16. If the premise for your trade has been invalidated (In this case price closing back below the breakout level), simply cut out and take a small loss.