- August 15, 2016
- Posted by: Dean Hyde
- Category: Trade Management
Placing your trade is only the first step. You also need to manage it, which means finding the right line between nervous tinkering and passive indifference.
You can’t sit on the fence as your trade crashes and burns, but it’s equally impractical to keep prodding at a trade that’s already working well.
The key is in knowing how to react when the market throws a spanner in the works, and how to stay out of it when there’s no need to intervene.
Being able to make quick decisions under pressure is what separates the great from the mediocre, and all it takes is for you to rehearse the right techniques and mindsets.
What follows is a collection of tips and tricks for managing your positions. They’re not all for everyone, so be sure to pick and choose the ones you connect with best.
On the multiplicity of trading methods
There are multiple ways to execute the same trade idea, with each calling for a different approach. If you plan to buy 6 mini lots, you might buy 3 at market price, with a buy limit for the following 3.
This means if the price falls back and triggers your limit, you will get a better deal on the other half of your trade, and your trade will have reached its full size.
This would be less committal than buying 6 mini lots all at once, which would remove your option to walk away from half of your intended position. Before you execute your idea, consider your entry method(s), position size(s), target(s), and stop-loss placement.
Think: “By doing what I’m about to do, am I making this trade easier or more difficult to manage in future? Am I simplifying or complicating things right now?”
The ins and outs of scaling
In keeping with the above logic, let’s imagine another example. We want to buy 3mini lots this time, by scaling in to the trade so that we can manage it as well as possible.
Instead of taking our position all at once, we take on three long positions for 1 mini lot each. This can be done using limits, or manually, as long as we end up with the right number of trades at the right size.
We might take one third off quite early, for safety’s sake. The next third will ideally make its target, but we might choose to dump it if we start to anticipate a reversal. The last third will either make its final target, or hit its trailing stop.
I like to think of these three positions as my fast, slow, and core positions. Scaling like this provides more optionality than simply taking one position, but it adds complexity. It really does come down to your preferences.
Three positions, three targets, one trade
Here’s what the concept of having multiple positions and targets looks like in more detail. Think of Target 1 as fast, Target2 as slow, and Target 3 as your core target:
Generally, the idea is to place your first target quite near your entry. This will help you lock in some profit early. Target 2 is placed at an achievable level (perhaps a key level if there’s one handy), ideally with at least a 2:1 risk/reward ratio.
Target 3 is more of a stretch, but not without logic behind it. Choose a significant level (e.g. prior support on the chart) and shoot for it.
There’s always the option of simply letting all your profits run (especially with certain setups), but that approach incurs the exact kind of risk that scaling and managing your trades with multiple targets mitigates so effectively.
This will probably be a judgement call every time you implement an idea; try to be guided by the market type, the fundamentals, and any key levels.
Those immediate reversals, though…
Good ideas can still go wrong, for any number of reasons. Be sure to pay attention to your charts after you enter, especially if you have pending limit orders on the line. If you catch a reversal early enough, you can change your plans and go on to benefit.
If you don’t catch a reversal early enough, you might end up with multiple doomed positions, comprising one ultimately doomed trade. Take a look at the following charts:
This is not to say you should be spooked at the first sign of turbulence, but it doesn’t pay to ignore bad signs either. This goes doubly if you’re using limits. If you see a reversal pattern you truly believe is going to endanger your targets, jump ship and live to fight another day.
Tight stops, and other protective measures
If you intend on moving your stop to your entry price, in order to rule out taking any losses, consider tightening it to almost that level, but not quite. The reason being it’s worth a small loss to protect against the possibility that price tests your entry and then continues in your favour.
In such a situation you would have been right overall, but for nothing. Your stop would have been hit for no good reason. Don’t forget to cancel any pending limit orders if you’re going to do this. Not only would you be stopped out, you would be in danger of automatically re-entering in the face of a sudden reversal.
Getting your trade to its full size
As previously discussed, you can construct the trade manually or by using limits; it will simply depend on how the trade goes to start with. If you are adding positions manually, it’s best to do so on the close of a strong candle, to confirm the trend’s ongoing momentum.
Sometimes, as is the case with low volatility breakouts, it does pay to scale quickly and aggressively. Again, this will be a judgement call, based on your conviction and the type of set-up:
Make sure to consult your RSI: it will help you exercise discretion. For instance, if we see an oversold market, it may not pay to scale into a short position:
This is a simple and effective way to avoid entering too late, and walking into reversals. The entry itself is and was fine, but we need to respect what the market is telling us here regarding the prospects of scaling in successfully.
Scaling in optimally
There is a lesser-known type of order called an OCO order. It stands for one cancels other, meaning you can place two pending orders and have one cancelled automatically as soon as the other is triggered.
If you want to double down on your short position, you might put a sell stop below the current price, and a sell limit where you anticipate the price will pull back to. If price falls, your sell stop will scale in for you, and if price increases, your sell stop will scale in for you.
This means you can sometimes get a better price (with the limit), and all the while you are actively insuring against missing a strong trend because you have another pending order ready to go if the trade goes for you.
Closed for business…
Not every trader will use time stops, but they do make sense in the right context. If, for instance, your strategy revolves mostly around the trading day in London, it might make sense to exit unresolved positions around the London close.
Just because you can trade in worldwide markets doesn’t mean you have to.
Insuring against whipsaws
In a fast market type, it doesn’t always make sense to leave your full position on. If it starts to look as though it might get choppy, there’s no harm in taking off 1/3 of your trade.
As you can see from the chart below, you can quickly get taken for a ride in fast markets. There are several ways to get out when this happens. The main thing to remember is to be quick and accurate with how you do it.
I tend to take some of my trade off when price moves back inside the Bollinger Bands, or when I see an obvious reversal candle (such as the bearish engulfing candle below). Instead of exiting at market price, I find it best to use a tight trailing stop.
Take some profit while you’re ahead
You don’t want to get into the habit of closing your winners early, but at the same time it’s important to quit while you’re ahead sometimes.
My personal rule is that if the market is giving me a 1.5% day at any given moment, I will lock in some or all of it. While it might lessen your hold on a strong trend, it will also protect you from reversals and increase your overall consistency.
Events, data releases, and volatility
Trends can be bolstered (or broken) by a single news story or economic release. Make sure you know what’s coming up, so you can tighten stops and reassess your positions ahead of time.
You can’t prepare for the unforeseeable, but heading into major economic events oblivious to the risks is just asking to get chopped up (especially in overbought or oversold conditions). Chain reactions can start quickly, and wipe out your gains before you even realise why it’s happening.
If trading has taught me anything, it’s that with the RSI near either extreme, the market can get volatile at the first sign of trouble. The answer is simple: pay attention to your economic calendar, and protect your profits aggressively if danger looms.
Again, I prefer to protect these kinds of trades by tightening stops, rather than exiting at market.
On mountain tops and reversals…
Charts don’t lie, but they don’t always tell the truth either. They simply are what they are, and you have to take them at face value.
If it looks like your trend is set to reverse, it’s time to act and drop some or all of your position. Consider this EUR/JPY chart:
By all means, persevere through these contrary patterns if you want to hold on for a huge winner, but I personally prefer to drop 1/3 my position in these situations. The rest gets put on a wide trailing stop.
Winning big… safely
If you want big results, you need to win some big trades – that much is self-evident. Following trends can get you there, but it can also be stressful when you expect breakout after breakout that never quite eventuates.
By scaling in and out of your trades, you can keep at least a small grip on your trend over time, which is a good thing. So when you do grab on, as the trend finally picks up steam, you’ll most likely want to use a trailing stop and consider scaling in again (and again) as it goes for you:
The super-trend indicator and a good mechanical trailing stop will go a long way to making sure you don’t forfeit too much potential profit, or give back more than you should.
Nothing lasts forever. Trends are typically followed by consolidation, as the market scrambles to find its feet again.
You will never have all the answers, so it pays to be cautious when following trends. I tend to trail the stop on my slow position, to avoid losing much of its profit.
By using 3 and 7-period EMA (after a trend has broken out), I can trail my stop to just behind the candle, rather than exiting exactly on the cross.
This is a similar technique to placing a trailing stop just behind market price when you want to lock in some profit – you want to leave yourself open to the possibility that the trade will still go your way.
Close, but no cigar…
If price almost touches your profit target and slips away, there’s no sense in losing everything you’ve made so far. That would be all-or-nothing thinking, which we’re trying to do away with.
With my longer-term trend following trades, I tighten my stop progressively as the trade moves towards my target. At 99%, price is only 1% away from my target, so I tighten my stop to 1% as well. This gives me an equal risk/reward ratio for the rest of the trade, while protecting my profit thus far.
There’s a line between closing your winners early and giving your profits back, and this is the way to walk it. Would you rather make most of your target, or give it all back?
Doubling down, or scaling in again
If something’s going well, it’s human nature to try and extend that. Sometimes you will find yourself in a situation where it seems foolish not to scale in again.
There are a few ways I do this, but the most reliable methods revolve around playing breakouts. Even busted breakouts are reliable enough, with a clearly supporting candle, such as in example (2) below:
- If the daily chart consolidates and then breaks out to confirm the trend, I am comfortable adding to my position. The same goes for confirmatory breakouts on the 4H chart in periods of low volume:
- If price action bucks the trend but then quickly falls back in line, it’s worth considering adding to your trade. This is the market telling you that, for now at least, the breakout is busted and the trend should continue.
- If the market isn’t overbought or oversold, I am happy buying or selling (respectively) when the 3 and 7-period moving averages cross, seeming to confirm the trend.
I like to use RSI alongside the 3×7 MA to decrease the chance of acting on bad data. If the indicators are in alignment, there is a much better chance of coming away with a winning trade.
It won’t happen often, but once in a while you’re bound to spike right through your profit target for no particular reason. These spikes can be due to news events, or they can just be the swan song of a dying trend.
You might want to scale in again, thinking the market is clearly going your way. You might also be completely wrong. Situations like these tend to mark reversals.
What you want to do instead is set a trailing stop for your whole trade to 1% behind market price. You might get lucky with more profit, but you want to be absolutely safe if the price whipsaws around.
There are a few exit signals you’ll get in scenarios like these. There’ll be one or more unexpectedly huge candles (depending on your timeframe) outside the normal volatility bounds set by the bands. Your RSI reading will be peaking one way or another, too.
If you’ve used take-profit orders for your targets, then you won’t have to worry about any of this. Still, it stands to reason that if you find yourself with unexpectedly large profits, your best move is simply to get out while you can and re-evaluate.
The key principles of trade management
You need to be clear about what you want from any given trade. Whether or not you have multiple positions to your trading idea, it will be your clarity that lets you manage it effectively. Without clarity, your trading will be inconsistent and you may just go around in circles.
Next, you need to simplify as much as possible. You might have no interest in hedging with OCO sell-stops and limits at the same time. That’s fine, as long as you know how you do intend to trade instead. Don’t take on new techniques for the sake of complexity: take them on for the sake of results.
You want to tend towards consistency and decisiveness, rather than chasing one huge winner to the detriment of everything else. This self-control and risk management will be what gets you seed funding, or a trading job, or even just long-term results.
Anyone can get lucky, but it takes truly hard work to become successful.