Big Mike's Trading Blog

Day trading futures, discussing money management and trade management techniques, and more

Defensive Trading

Remember, the #1 goal of each trade is to not lose money. By protecting yourself from loses, the winners will come.

Defensive Trading is all about this type of planning and discipline. Just like when you are out driving your car you have to be on the defensive, the same is true of trading. For instance, when you are the first in line at an intersection and the light turns from red to green, you should always look to make sure the other cars have stopped. If you do this every time then your chances of pulling out and being hit by another driver are reduced.

You can apply similar principles to trading. When you take a position, you should know your exits. It's like knowing your blind spots. If something bad starts to happen, you'll know how to get out. You need to make those decisions in split-second timing, just like with driving, because any delay could cause a major accident or with trading, major losses.

Here is a short list of defensive trading techniques:
  • Always know ahead of time at what point you'll exit a trade.
As you take a position you should already know what your exit signal will be, whether it be based on a lower close, or based on a dip in volume, a moving average cross, whatever works for you. The point is to plan ahead, and then trust that decision and follow it instinctively in real-time.

  • Don't jump from trade to trade trying to find the trend.
How many times have you changed lanes on the freeway while in traffic, only to find that your new lane stops and the lane you just came from is now the one moving. The same is true of trading, you need to step back and look at a bigger picture to follow the trend, think of it as viewing the highway from a helicopter instead of from your vehicle.

  • Trust your gut.
That brain of yours was given to you for a reason. If you get a bad feeling while in a trade, then get out. How many times have you entered a trade, got a sick feeling about it, and then started hoping it would turn around as it moves further and further against you. Ok, now how many times have you got that sick feeling and then it turned around and you made money? That's what I thought. Defensive Trading is about minimizing exposure and risk. If you have a bad feeling, then get out!

  • Look for high probability trades.
When you are stuck in traffic and need to get home soon, you think about your route and your options and weigh them. Trading should be treated the same way. You don't just start randomly taking streets you aren't familar with in the hopes one of them will lead to your driveway. No, you look for streets that you know work. Same with trading -- look for setups that you know work.



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