This article is going to describe two slightly more advanced trading techniques: how to trail a stop and how to maximize profits by trading multiple lots.
Let’s cover using multiple lots first…
Since as traders we always want to minimize risk as much as possible, I offer the following cautionary note: each time a trader adds an additional lot to a trade, they take on more risk. It may still be only one trade, but the size of the trade obviously plays a part. For example, if a trader opens a single trade with a 100 pip stop, they take on 100 pips of risk. If they open the same trade but with three positions, they are taking on 300 pips of risk! It is imperative to be sure that the size of your account can handle the additional risk.
Here’s a quick way to make that determination…
A trader should never place more than 5% of their trading account at risk at any one time. When trading a 10K lot, one pip, depending on the pair being traded, is worth roughly $1. So a 300 pip stop would equate to a $300 risk. If we divide $300 by .05 we get $6000. That means unless you have a $6000 account you should not be taking on $300 worth of risk. Possibly the trade can still be taken but with some adjustments to the size of the trade or the size of the account. Either the size of the trade can be made smaller or the size of the account can be increased.
Moving on to implementing the strategy…
Since a picture, or a chart in this case, is worth a thousand words, let’s take a look at a historical 1 hour chart of the GBPNZD to see how we can employ our trailing stops and multiple lots strategy.
Here’s how we will trail the stop…
Since the pair is in a downtrend, we could enter the trade by selling three 10K positions at the point labeled “Short Entry”. Price has broken through support triggering our entry and the stop would be placed at the “Stop 1” level. As price continues to move in our favor and breaks below the second green support level, we would close one of our three positions and move the stop to the “Stop 2” level.
By doing this we have locked in roughly 110 pips of profit
We also have placed our stop above a new resistance level so that our two open positions are protected. Moreover, since our stop is now below our entry at this point, if the pair retraced and hit our stop we would show a small profit on the remaining two open positions plus the 110 pips we gained by closing the first position. At this point, we have removed all risk from this trade.
As price continues to move in our favor, making lower highs and lower lows, when it moves below our next green support level we would close out one more position locking in a gain of about 310 pips on that one and move our stop to “Stop 3”. As it was in the case above, we have locked in more profit and, by trailing our stop to the next level of resistance, we are protecting our “floating profit” on the remaining third position which is still open.
On the last open position we will simply continue to trail the stop using the same method as above. When price no longer continues to make lower highs and lower lows, we will be stopped out at some point as the pair retraces.
So as price moves through the next green support level we would advance the stop to “Stop 4”.
We can see that price did not continue to move lower and, as price retraced, we were stopped out at the “Stop 4” level. Since our third position had been open since the very beginning of our trade, we were stopped out with a gain of 320 pips on the last 10K lot.
Overall, the total gain on the three lots was 740 pips
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Had a single lot been placed on the trade the gain would have been 320 pips. Now, don’t get me wrong, 320 pips is nothing to sneeze at. However, given the choice, I’ll opt for 740.
From these examples the potential benefits of manually trailing one’s stop and trading multiple lots is quite apparent.
As always, when trying anything for the first time, be sure to test the concept out in a demo account numerous times until you completely understand the process.
All the best and good trading,
Richard Krivo
@RKrivoFX – Twitter
rkrivofx@gmail.com
I use trailing stop on mt4. but I do not understand why it does not work, please help me! I have done wrong?
Hi Lana,
There’s no default trailing stop built into MT4. You either have to use an expert advisor or to trail the stop manually.
Shaun, of course there’s a built in trailing stop in mt4; you need only right click an order and select trailing stop and set how many points you want it to follow with. It says pips but it’s actually points so 100 points is 10 pips. It works perfectly.
Then I stand corrected!
This article is about a technique called scaling out, and it doesn’t increase your profit, it decreases it. Had you left all three positions open until then end you’ve have gained 960 pips rather than only 720. Scaling out might make you feel better for locking in profit (which can be done just as well by moving the stop up) but it never increases your profit. Scaling out, i.e. removing lots from a winner, decreases your position size and thus decreases your profit.
The opposite technique works much better, scaling in. Open one lot and add a new lot at each pullback. Adding to winners is less risky and more profitable than killing your winners by scaling out of them.
Scaling out never makes financial sense, it only makes emotional sense because taking profit makes the trader feel good.
Ramon provides a good comment. Too bad the author has not responded (not that Ramon was challenging him). I’d like to hear of Mr. Krivo’s experience with the scale-in method.
Hi Scott…
I have employed the scaling out method for quite some time and have been pleased with the results. While one tries to get the maximum amount of pips on each trade, trade management will vary from trader to trader as well as with varying market conditions.
Regards,
Richard
Hi Ramon…
I see where you are coming from. Had the trader known that the trade would make 960 pips from the time of entry, it would make perfect sense not to scale out. Moving the stop is good (I trail stops quite a bit) but then, if the trade retraces, the trader is giving back pips. The premise of scaling out is based on the idea that we do know how far a trade will move in a positive direction so we take what the market is giving us as the trade progresses. Scaling in, scaling out or maintaining the same trade size throughout are all valid trading techniques. Try various measures over time and see what works best for you under a variety of market conditions.
Regards,
Richard
I’m not sure it requires a response. It will vary depending on which way the market goes.
If the market continues to favor the direction of your trades scaling out will reduce your gains.
If the market turns against you scaling out will save some of your gains and reduce your losses
I did simulation on Excel to compare scaling out with holding all three positions and just moving stop orders. Actually if you were stopped at Stop4, then by holding all three positions and moving stops, winning is bigger then scaling out. But if you were stopped earlier, like at stop2 or stop3, then scaling out results its better. Also I tried to compare pyramiding (adding positions), but results was worse too. Even If I increased initial position size 3 times to match risked capital amount of 3 positions, pyramiding produces better results if stooped on stop4, but in another cases results are worse. Can I make conclusion that scaling down is good for getting better results constantly. And other systems better for catching extreme runs?
Hi Alex,
What instrument and on which time frame did you do your tests? What were the stop distance values for stop1, … , stop4? I need more context to make sense of your explanation.
Merry Christmas!
Shaun
Hi Alex…
What works well in one situation (market condition) is not necessarily going to work well in another situation. I have found that, over time, I capture more pips by adapting a method whereby I lock in some profit as the trade progresses in my favor while leaving a portion of the trade on to capture more pips if the trade continues to move into profitability.
Regards,
Richard
How could I write an ATM strategy
2 contact YM stop is 8 ticks 1st 2 contact after 6 ticks of
Profit move stop to breakeven plus 1
1 exit 1 remain as a runner, stop remain at breakeven plus 1
Hi Dave,
I removed your email from the comment to protect you from spam. We’ll email you an estimate.
Hello,
I didn’t understand how can I get/buy this Multiple stops EA.
Please, send me the link. I am very interested to buy it.
I find that the real problem with starting with large lot size, or three simultaneous smaller lot sizes, and scaling out, otherwise know as partial closes, is that when the trade reverses before your first partial close, you end up being stopped out with a large lot size (or all three smaller ones). While when the trade goes in your direction, you start with a win of only one third of the lot size at the first TP etc
So over time you win in pips, but lose in $ terms. That is what my testing has shown me.
Eg a USDCAD strategy with partial closes, 175 trades, 62% wins, profit -4,3%, net pips 2157!!
I win in terms of pips, but I lose in terms of $ profit.
Hi, I am just starting to learn forex trading. Can this strategy be used in MT4?
Yes