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A Key to Profitable Trading: Trade Management

Tuesday, May 15, 2018 21:26
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I view Trade Management as the third most important aspect of my trading routine.  In this and next blog, I’d like to share my thoughts on the subject.

Let’s start with an example.

I had a strong April – so far as my ROI was concerned. Then May rolled around. I have found few low-risk opportunities and the two trades I have taken, one produced a small loss and the other a small profit. May is so far returning an ROI of -0.13%.

The trade I took in the GBPUSD is a classic example of what I have been experiencing.  I trade the 18-day swing (monthly trend).

The chart below shows that, in June 2016, the GBPUSD broke down from a congestion that began in December 1987

GBPUSD, Long-Term (chart through the courtesy of www.chartstore.com)

The next chart shows that since the breakdown, the pair went through a Wyckoff retest of the breakdown and resumption of the down move.

GBPUSD, Monthly

The charts above provided the context. The next chart, the 18-day swing, forms the core of my analysis.

GBPUSD, 18-day and 5-day ( red = 18d, blue = 5d)

Note:

  1. The move down started as an R2 trend, i.e. you are unlikely to see a 5-d correction, only 60-minute and 290-minute ones.
  2. For the R2 to end, we’ll need to see a close above the 2×1 Gann Line.
  3. The current state of the trend shows an inflexion point. The sideways price activity of the past 8 days has shown a slowing of the R2 momentum. If we see a close above the 4×1 line, I’d expect to see a retracement to at least 1.3632. On the other hand, if the pair shows some downside momentum today, then the previous R2 Momentum would stay on track.
  4. April produced strong ROI results. I sold the pair twice (red arrows) and have ‘last thirds’ in both open positions. I can’t lose on either.
  5. Last night I saw an opportunity to add to my shorts.

The chart below shows: the two entries:

  • The two entries, one at 1.3560 and one at 1.3483
  • It also shows what happened after the entry at 1.3483 – the GBPUSD rallied strongly, returning to congestion.
  • When I take a trade, I have two initial exits:
  1. A ‘hard price stop,’ i.e. a price stop placed in the market; and
  2. A ‘soft stop’, an exit based on what I don’t want to see following my entry (as well as what I’d like to see).
  • In this case, the 1.3483 was a breakout trade following eight days of sideways price action. I took the view we should see a larger than expected range (normal 90 pips or so; I was looking for around 120). I did not want to see prices move back into congestion.

So, this morning, I placed a buy order at 1.3493 (a price I thought we’d most certainly see sometime in the morning).  I’ve also brought the stops down to above the morning’s swing high.

Why didn’t I exit the shorts at 1.3560? Because the daily was equivocal!

The level of yesterday’s close leaves open the possibility of renewed downward momentum. And, the second reason….if I am wrong and the market rallies, I’ll stop out without loss on the trade.

That’s the difference between the two trades:

For the breakout trade, if I’m proven wrong, I’d take a loss that would impact my account. By exiting at 1.3493, I keep the loss to an inconsequential 11 pips. (I can always make 11 pips).

The narration sets out all the elements of my trade management strategy. Tomorrow, I’ll run over them. If you have a moment, see if you can create your own framework from the story. Then compare it with my blog tomorrow. If you find a difference and are willing to comment, we both will be the wiser.

The post A Key to Profitable Trading: Trade Management appeared first on Ray Barros’ Blog for Trading Success.



Source: http://www.tradingsuccess.com/blog/5931-5931.html

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