Trade management is the act of tending an open position in the market. It involves addressing risk and reward in real-time as price action evolves. For intraday, day, swing, and long-term stock traders, savvy position management is a vital part of sustaining profitability.
Stock technical indicators are popular devices for trade management in the equities markets. Read on to learn more about the top three tools traders use to capitalize on the opportunities offered by shares and indices.
Regardless of your trading or investment strategy, aligning stop losses and profit targets is an essential part of optimizing risk and reward. Here’s a brief primer on each:
Stop losses: A stop loss is a price point where a trader deems an open position to be ineffective. Once a trade’s stop is reached, the open position is liquidated and a loss is realized. Stop losses may be orders resting at the market, a percentage of a trader’s risk capital, or a mental threshold that closes a losing position when triggered.
Profit targets: A profit target is a price point where a trader deems an open position to be effective. Once reached, the open position is liquidated and a gain is realized. Like stops, profit targets may rest at market, be a percentage gain, or a mental threshold.
Traders use stop losses and profit targets to quantify risk and reward. A stop loss represents the amount of capital put in harm’s way on any given trade, while a profit target is the same trade’s projected return. As long as returns outweigh losses, a stock trader or strategy will be profitable.
Traders frequently use stock technical indicators to identify the location of both stop losses and profit targets. In doing so, they influence a given trade’s assumed risks and potential rewards. Three of the top technicals for stock trade management are Fibonacci tools, moving averages, and Bollinger Bands.
Fibonacci tools come in a variety of shapes and sizes. For trade management, two of the most popular are Fibonacci retracements and Fibonacci extensions.
Traders use Fibonacci retracements to measure the degree of a pullback in price from a periodic high or low. Retracement levels are set against the prevailing trend, and popular levels are 23.6%, 38.2%, 61.8%, and 78.6%.
Fibonacci extensions are used to estimate ranges in price that exist above or below a periodic extreme or price point. Fibonacci extensions typically run with the prevailing trend. Popular levels are 61.8%, 100%, and 161.8%.
Just as traders use stock technical indicators to manage open positions, retracements may function as stop losses with respect to pullbacks in price action. Conversely, extensions work well to locate viable profit targets by estimating a forthcoming directional move in price.
Moving averages (MA) are flexible indicators that may be viewed as support and resistance levels or trend and reversal signals. This functionality may be applied to trade management in terms of stop losses and profit targets:
Stop loss: In the event that price crosses above or below an MA, an open long or short position may be closed. For instance, if price is above a 200-day MA, bullish sentiment is prevalent, and a long position may be warranted. Should price fall beneath the 200 MA, any open long positions could be deemed high risk and closed out.
Profit target: Moving averages that exist above or below price may also act as profit targets. To illustrate, assume that a trader takes a counter-trend short trade above a moving average. An intuitive placement for a profit target would be at or near the MA itself because the MA may be thought of as a potential support area.
Bollinger Bands (BBs) are also powerful stock technical indicators for trade management. BBs are indicators that quantify price elasticity and consist of three lines: an upper BB, lower BB, and midpoint.
Traders have a multitude of ways to use BBs in stock trade management. A trader can use each BB as a profit target or stop loss. Many reversal traders favor using the midpoint as a profit target, while trend traders use the midpoint as a stop loss. BBs may be applied to the position management aspect of any stock trading strategy, specifically trend-following and reversals.
If you want to learn more about technical analysis, check out the free StoneX trading guide Technical Analysis for Beginners. In it, you’ll find helpful tips for incorporating technical analysis into your trading strategy. If you’re an aspiring market technician, download your free copy here.