What to do when a trade is not working out?

Sometimes even short ideas are very powerful and that is what I want to do in this series of videos where I will take one simple idea from my own experience that helped me become a better trader.

Hopefully, you can use that idea and apply that in your trading journey as well. Today I want to talk about a trade that is not working out. Every time we take a trade, the basic assumption is that the trade would workout and everyone takes a trade assuming that the trade will work out.

Else, what is the point of taking a day trade? When you’re putting the money on the line, you are assuming that your analysis, chart reading is correct, or whatever that you’re looking at is reasonable enough to put the money on the line so that you can make some profit.

However, as we all know that, in trading, sometimes we are right and sometimes we are wrong.

Now when we are right, of course, then there is a completely different way of looking at the trade, but I’m going to talk about when we are wrong. When we are wrong, our basic assumption, almost all the time is to think about stop-loss. We always think about the maximum loss and that is what conventional wisdom is about.

If you’re wrong, we have a stop-loss and let it get hit for us to be able to get out of the trade. What I want to tell you though is that between taking a trade and getting your stop-loss hit, there is one logical point at which you should pause and make a decision. That decision is that of a graceful exit.

Let me explain that using real-life examples. So today I had a bullish view of bank nifty. This is a chart of nifty and nifty, yesterday, had a good rally. I was expecting that since the rally happened on nifty yesterday bank nifty did not perform and I was expecting the rally to catch up on bank nifty today.

I had a very strong conviction that bank nifty would outperform and so I was willing to take a big trade in the hope that if the trade would work out, I will make some significant money. So, this is what I did. I took a trade on both nifty as well as on bank nifty and the quantity was significant on both of them, but given the movements in bank nifty options, you can easily imagine that this trade had a higher stake as compared to the nifty’s trade because nifty doesn’t move as significantly as bank nifty. Now let’s take a look at the chart. I took the trade at 9:36 AM and now this is how the chart of bank nifty is looking like.

Bank Nifty opened up and then there was a fall and again there was a fightback. Then again, it started to come down and it was a struggle. Thereafter, it came down all the way here and then of course, throughout the day, it stayed choppy. Look at the divergence of how nifty ended, which is flat versus how midcap ended, which is extremely positive.

2.74% versus my own back nifty. I had a choice of taking a trade on nifty versus bank nifty versus individual mid-caps, but I went and a bit the completely wrong horse. I was wrong and so this is the scenario that I was talking about it, i.e. when you realize that the trade is not working.

What should you do? Should you wait for your stop-loss to get hit? What I did was after I took the trade, I gave my trade a decent amount of time. I thought that I took this trade on bankruptcy and I’m going to give it till 10 o’clock that if my assumption that bank nifty is going to outperform today is true, then that breakout should happen.

If, however, the breakout doesn’t happen by 10 o’clock, I don’t want to be in the trade and I will look for exits. So in the trade that I took, I had a maximum stop loss of 50,000 rupees. When I take a trade and the trade is not working out, I don’t necessarily think in terms of the stop loss. I think in terms of taking a graceful exit and so this is what happened. Bank nifty of course was weak in the morning.

Then there was some ray of hope that Bank nifty was picking up, but then immediately it got negated and there was one more attempt made by bank nifty, but till 10 o’clock it became very clear that my assumption of taking the trade was invalid.

I was expecting a breakout on bank nifty and this price action doesn’t inspire any confidence of any kind of a huge move on bank nifty. In the second half, anything can happen, but at least in the first half, my trade got negated. As soon as my trade got negative, I started thinking in terms of a graceful exit. So what is a graceful exit?

Graceful exit means the market is giving me a chance that even though I was wrong, the market is telling me that if you want to get out, this is your chance. Take it or leave it. Then, sometimes you are in profits or losses. It’s your job to accept that the assumptions on which I took the trade, the price action is not supporting that assumption and I need to get out.

What I did was I got out of my Bank Nifty trade at 10:03 AM and 10:06 AM and then I also exited my nifty trade at 10:06 AM. Eventually, I made some money because of the graceful exit that I got from the market. This is what I need to tell you guys, and this is something that you need to keep an eye on. Had I not taken the graceful exit that I took, you can see how painful this would have gotten. So I had shorted this guy and you can see that this guy went up to 350.

With my position size of 500, this kind of move against me would have easily given me of loss of 50 to 70,000 rupees. This is what I’m talking about when the trade is not working out. When your original logic based on which you took the trade is no longer valid, don’t think in terms of your stop loss, because what will happen is of course, yes, stop loss will get hit, but do you need to wait for the stop loss to get hit?

If the original reason for taking the trade is no longer valid, why don’t you look for a graceful exit? How then do you make a graceful exit? You break down your lot size. If you are working with 100 shares, or you have 1000 shares, you should slowly start to get out of your trade.

I will tell you one of the psychological issues that happen when the market gives you that graceful exit. You should take that little profit and come out or take that very small loss and come out. The problem is when the trade and when the market comes to that point, instead of taking that gracefully, we start to become greedy.

We start to think that the trade is going to work out now. All of a sudden, the desperation that we were into 5 or 10 minutes back now starts to turn into becoming greed. We now think that if it is working out now, I just have to wait a little bit longer and now that will turn into a profit.

That is where a lot of traders make mistakes. Once you know that the trade has been negated, you have no business staying in the trade. Your mind should only be thinking towards taking a graceful exit. Remember again that if a trade is not working out, take a graceful exit.

In my case, I was lucky enough to be in a profit, but sometimes it can even be a small loss. That’s okay. Whatever the market gives you, take it. After exiting, if the trade eventually works out, don’t regret it. You might now think that I should have just stayed in the trade instead of taking the exit and I would’ve made much more and that is wrong. The original hypothesis, set-up based on which you took the trade became invalid and hence there is no reason to stick around in the trade. You can take another trade later if things start to look better. However, the original trade is no longer valid.

The only option that you have is number one, wait for your stop loss to get hit, which in my case was would have been a loss of about 50 to 70,000 rupees or take a graceful exit. So I like to make a graceful exit as much as it hurts. It’s not easy, but I would rather take a graceful exit with a small loss or a little bit of profit rather than waiting and hoping and let my losses become bigger.

It then becomes more and more painful as time goes by. Then there is again the problem of repentance where you think that I could have gotten out of this state twice or thrice, but I did not take it. I don’t want to repent and want to just get out of a bad trade as soon as possible.

Think about the graceful exits as a very strong fundamental philosophy, and that helped me and my trading techniques.

I hope that you will also consider it in your trading journey.