Here are a few steps one might take in addressing that question.
First and foremost, do I have a target and a stop? Until you can
answer this in the affirmative, go no further. Does my trading plan
allow for me to hold overnight positions? If the answer is no, then
the answer is no. Any revisions to a trading plan should be made in
the quiet solitude of the weekend or preferably at month's end, and
certainly not with the intention of affecting an existing position
or while contemplating a trade. Changes to a trading plan are to be
made from a position of objectivity; not on the fly.
Is the position too large to hold overnight? Based on margin rules?
Based on maximum potential risk on a given trade or on a given day?
Of course there is always the possibility of scaling back to smaller
size and closing a portion.
However, say you've addressed the above items and there are no such
constraints. What is the real issue at hand? The potential gap up or
down (possibly news or event driven) that you may face the next morning.
Once the market is open, you have plenty of techniques to help you
decide what to do. It's the gap against you that you have limited
control over.
To attempt to avoid "monster" gaps against you, your plan can include
a rule not to hold (long or short) over earnings announcements and a
rule not to hold into a major press release or scheduled conference.
The same is true for Federal Reserve Board speeches, major economic
reports, etc. Consider whether you will hold over weekends and/or
holidays, whether option expiration is an issue, and any other rules
that might trigger automatically closing a position. (One thing we
like to do is trade the indices during the peak of earnings season.
This way although of course indices can be volatile, we don't have
to worry about the surprise tech stock getting cut in half with us in it!)
Also, remember it's not the news; it's the crowd's perception of
the news that matters.
Based on the current daily pattern in this stock are we likely to
gap up, down, or open neutral? Based on the pattern of the indices,
are we likely to open up, down or neutral? Are you profitable in
this trade yet? How far is the primary target? Where will the gap
against you land you from the standpoint of support or resistance?
What about the moving averages on various chart timeframes? All of
these are valid questions. There of course is no perfect magic bullet
answer. But asking all of these questions will keep you focused!
Of course all the plans and all the rules in the world will not help
you if you do not stick to them. And always remember the suggestion
of closing half and holding the back half, which is very effective
in mitigating risk. It is systematic, realistic and allows you to
participate in larger moves without a high degree of exposure.
For a FREE report on HOW TO TRADE FAST and a free trial to Stocks2Watch®, click here
http://urlcutter.com/Stocks2Watch
ABOUT THE AUTHOR: Larry Potter is a recognized authority on the subject of trading
and has been publishing his newsletter, Stocks2Watch®, since January of 1998. Each
evening, his newsletter contains picks for the next day and always includes a free trading tip.
