One of the biggest trading mistakes you can make is not following thru with your reason or theory for taking the trade in the first place.

You always have a reason for taking a trade. It could be based on fundamentals, technicals, or simply because you’re following someone else into the trade (something which we’ll discuss in another post). Whatever the reason for your trade plan is, you need to be prepared to follow that plan, unless your plan tells you to get out.

For example, let’s say you decided to buy stock XYZ based on a breakout on the daily chart. Whether you’ve made the right decision is irrelevant, because it’s impossible for anyone to know what the stock will do in the next tick. What matters is that you created a plan based on a theory that you espouse, and you’ve acted on it by hitting the Buy button.

If you’re basing your trade plan on a daily chart, your Stop Loss should be based on that chart timeframe too. That means you might have to sit thru some short term volatility before your theory plays out, assuming that XYZ doesn’t just go in a straight line up and to the right. If you’re watching a 1 or 5 minute chart, you might get frightened and shaken out by a small pullback, even though the stock is still above your stop level.

It’s totally natural to start sweating when you start seeing red on your trade and your account. But here’s where trading psychology comes into play and where strong traders differentiate themselves from weak ones. Your initial trading plan needs to overpower the scared voice in your brain begging you to stop the pain and bail.

Now to be clear, there are valid reasons why you might want to scrap your trading plan and exit the trade. Perhaps a news story broke, which nullified your trade theory. Or maybe downside volume starts coming in heavy and fast, signifying a major change of momentum, and you don’t want to wait for your stop to hit because you believe that your original trade theory is no longer valid.

But assuming that your trade theory is still in tact, one of the main reasons that you are feeling your chest tighten on every downward move is that you are in too heavy. You’ve bet too much of your capital on this particular trade and you are scared to lose it. This is totally natural! Nobody enjoys losing money. But if you want to trade successfully, you need to accept that you have a 50% chance of losing on every trade you take. How much you’ll lose is totally in your control, because you have the power to click the sell (or buy, if you’re short) button and stop the pain.

Entering a trade with too much size is going to make it much more difficult for you to stay in the trade. Before you enter the trade, you need to calculate your position size based on the position of your stop. If you’re not prepared to lose that amount of money, then you have to reduce your position size. Otherwise, you can find yourself bailing on a position even though you still believe that your trade theory will play out. And there’s nothing worse than closing a trade for a loss, only to then watch it bounce back up and continue moving higher, just like you anticipated in would when you got into the trade.

Here are some things to do to avoid making the mistake of not following thru on your trade plan and getting shaken out of a potentially winning trade:

1. Determine the nature of your trade.
   Are you looking for a quick scalp or more, or do you plan to swing the trade for several hours, days or weeks? If you’re looking for the quick move, you should be primarily using the 1 minute chart, while still looking at the 5 and 15, and even longer timeframes to identify major support and resistance levels. For longer term swings, should be focusing on the 15 and 30 minute for intraday moves, and then hourly and higher for the swing.There are times when you might be planning to swing, but the the stock moves so quickly in your direction that you decide to take your profits immediately — and there’s nothing wrong with that. Remember, you can always get back into the trade on a pullback or if the stock continues to trend higher and you believe it’s got a lot more gas in the tank. You can also exit part of your position to reduce your stress level and manage your risk, and let the rest ride a bit longer.
2. Establish the reason for getting into the trade.
   There are lots of different reasons to get into a trade. Everyone needs to find their own edge and style that works best for them. But the reason that compelled you to put on the trade should also tell you when to exit it. For example, if you got into the trade because the stock held a support level and bounce, then as long as that support level continues to hold, the reason for the trade remains in tact and you should therefore stay in it. If you’re following options flow, then you should monitor the open interest to see if the flow buyers are still in the trade.Of course, you’re original reason for entering the trade can always be superseded by new information or events, and you need to be prepared to pivot if that happens. But assuming that nothing new happens, your trade theory should hold firm and keep you in the trade until you either stop out and take profits.
3. Don’t micromanage swing trades.
   If your plan is to swing a trade and you’ve set your stop, don’t your day glued to a 1 minute chart of the stock. All it’s going to accomplish is stress you out if it starts moving against you and shake you out of the trade. Look at a different ticker or get up and do something else if you have to.
4. Don’t look at your P&L.
   There’s a reason why casinos make you play with chips and not cash. If you’re putting down hard earned 20 dollar bills, you’ll probably quit pretty quickly if you start losing. But when you’re playing with chips, it doesn’t seem like real money, at least until you check your wallet at the end of the night.Trading is something like educated gambling. You can base your trades on research and probabilities and manage your timing and risk, but at the end of the day, you still need to plunk down your money and leave its fate up to the market Gods, who can and will do everything possible to take it from you. You might be able to stack the odds in your favor if you have an “edge”, but you are still putting your money at risk because you have no idea what will happen in the next second. If you did, you’d go all in, right?Like I said before, when you trade, you must be prepared to lose money. Even if you are prepared to take a loss, no one actually wants to lose money, especially if losing it will cause you pain. That’s one of the reasons why proprietary traders working for institutions or trading firms can stay in trades and win much longer and more than individual retail traders. They’re playing with money that ins’t their own which, if they lose, won’t cause any pain to anyone. So they can sit in a losing trade for what seems like an eternity and still come out a winner, whereas a retail trader would feel the pain and close the same position at a loss.Watching you’re P&L turn red is a sure way to mess with your psychology and shake you out of a trade that has not broken your trading plan. Watch a stock chart if like gambling with chips. Watching your P&L is like gambling with cash. Take a lesson from casinos and focus on the chart not your cash.

Bottom Line

Not following thru with your trade plan is surefire way of setting you up for a losing trade. To avoid following thru with your trade plan, make sure you establish your reason for getting into the trade and whether it’s a scalp or swing, and try not to micromanage and focus on your P&L instead of on the chart.