So far in this series about building a solid trading strategy we’ve gone over picking a time frame, determining trend direction and deciding on trade entry criteria and initial stop loss level and take profit level placement. We even talked about using higher time frame trend direction to filter trades. I now want to go over trade management.
Just so you know, I’ll be going over money management in the next installment. When you place your trade, you need to decide on the proper lot size according to your money management strategy. This is one of the most important parts of your trading strategy, so I want to go over it separately.
What do you do after the trade is placed?
Let’s assume you’ve figured out when to get into the market and where to place your INITIAL stop loss and take profit levels. Now what? Well, now you need to “manage” the trade. I want to give you some ideas to think about.
Set And Forget Strategy
You could simply set up the trade with the initial stop and take profit and forget about it. This is common with fixed time trading or end of day trading where you set up your trades once, at the same time every day. When the trade is placed there are 5 things that can happen…
- Your take profit is hit.
- Your stop loss is hit.
- You come in the next day and the trade is open, so you let it run until either stop or target is hit.
- You come in the next day and the trade is open in profit, and you manually close it.
- You come in the next day and the trade is open in loss, and you manually close it.
Time Based Trade Expiration
Let’s say you are trading the New York session and place a trade. You set your initial stop loss and take profit, but don’t want the trade to keep trading past 3 or 4 o’clock when the trading volume is less. You could have a rule where you close trades at a certain time if it is still running and hasn’t hit stop or target levels yet.
Move Stop Loss To Breakeven
At some point in the trade, you might want to have your stop moved to breakeven or a little better.
- If price goes in your favor X number of pips you could move your stop to breakeven.
- If indicator Y changes to Z you could move your stop to breakeven.
Nobody likes to see a trade that goes into profit turn around and end up in a loss. By moving your stop to breakeven at some point, you take the risk from the trade. Once you are in a no risk trade it is much easier to handle psychologically. (You must also be prepared to be stopped out with no gain or a very small gain).
Similar to moving your stop loss to breakeven, you could trail your stop at certain points to lock in profits. Here are 4 typical ways of doing this…
- Trail the stop a certain pip distance away from price. For example, a 30 pip trailing stop would trail price by 30 pips.
- Trail the stop by incrementally moving the stop at specified pip distances. For example, if price reaches 50 pips, move stop to 20 pips. If price reaches 80 pips, move stop to 50 pips. And so on.
- Trail the stop using a certain number of candles. For example, if you are in a buy trade, you could trail your stop by 3 candles. The stop would move to the lowest low of the previous 3 candles.
- Trail the stop using some type of indicator like a moving average or fractals. Basically, the stop would trail the moving average indicator or place the stop when a fractal is formed.
There are many other ways of trailing stops, but you get the idea. (Maybe I’ll do a post just about trailing stops in the future).
Partial profits are when you take a portion of your position out of the market at a specified time, and let the remaining portion run. For example, you place a trade with 1 lot. Your final take profit is 100 pips, but you take half the position (0.5 lots), off at 50 pips. You let the remaining 0.5 lots run.
Closing The Trade Early
At some point you might decide it is just time to close the trade. The most common occurrence of this is when you get a trade signal in the opposite direction. Or, you might be trading multiple pairs and want to close all pairs when your profits reach a certain dollar amount over all.
The Importance Of Automating Your Exit Strategy
OK. I think you can see there is a lot to think about AFTER the trade is placed. It is important to have a plan BEFORE you get into the market to keep yourself from making decisions based on emotions. In a lot of ways, managing the trade is the hardest part of trading.
Don’t forget, your trade management strategy can be a combination of many of the strategies I’ve mentioned.
- At a certain point you want to remove risk, so you move the stop to breakeven
- At a certain point you want to bank some profits, so you take a portion of your position out of the market.
- At a certain point you want to lock in the remaining profits, so you trail your stop.
Many people are very rational BEFORE the trade is placed. But once in the market, where real money is at stake, they become irrational and emotional. Here is a common scenario…
- You wait around for hours for the perfect setup.
- You finally find one and get into the market.
- Price goes against you and you suffer because you are in loss.
- Price finally turns around and you are showing a small profit.
- You don’t want to lose the profit, so you close the trade early with a small win.
Basically, you just blew up your trade plan. And since your trade plan should give you an edge and put the odds slightly in your favor… you are now just gambling.
For these reasons, I believe it is very important to automated your exit strategy. Obviously, if you are automating your entire strategy, you need to program your trade management into the robot. But even if you are a manual trader, you should think about creating an EA to automate your exit strategy and take yourself out of the trading.
What techniques do you use to protect profits in your account? Share your ideas in the comments section below.
Read the article in the series: How to pick your money management rules