Posted 15th March 2017
In today’s Profit Watch:
• A tip for managing risk
• Staying with the trade
• PLUS: Don’t be afraid to take profits
Big day today – it’s the Fed rate decision at 7pm. If you’re looking to get into the market with any very dollar-sensitive positions, be sure to manage your risk.
When it comes to managing risk, here’s a smart trick that’s good to employ if you can.
I say ‘if you can’, because it may not be possible.
It kind of depends on your bank size (how much you have in your trading account) and the minimum trade size you can do (which varies from broker to broker).
But here’s the general idea. I’m just going to cover the basics today. If it’s something you want me to go into more detail on, let me know by emailing me.
I think it’s a good idea to enter your position in parts. There are two benefits:
1. You can improve your average entry.
2. You can take profits on part of your position and leave some running for bigger gains.
Sound good? Let’s look at how you can do it. (Again, you experienced traders, if you fancy chipping in with your own methods of managing your trades, I’d love to hear your ideas.)
Splitting your position into parts
Let’s say you fancy shorting the euro versus the US dollar. In other words, you want to SELL EUR/USD.
You’ve done all your analysis on the charts. Lower highs and lower lows point to a powerful downtrend in play.
From a fundamental point of view, the chance of further monetary stimulus from the European Central Bank on the one hand… and talk of raising rates from the US Federal Reserve on the other hand… supports the bearish case for the euro.
So you look at the lower timeframes on the charts and see a pull-back in the downtrend as a good opportunity to enter your trade. You can see a clear pathway to a target, say, 100 points lower.
You also have a decent level of resistance higher up. By placing your stop loss above that level, you can cap your risk at, let’s say, 50 pips. If it hits that level, you’ll be out of the trade.
So in terms of your risk/reward profile, it’s a nice 1:2. Your potential reward is twice your risk – a good thing to aim for as we discussed here.
In terms of trade size, you calculate that you can bet £3 per pip on this trade. If you’re stopped out, you’ll lose £150 (£3 multiplied by your 50-pip stop loss) which is 2% of your £7,500 account.
So you’re ready to go. You can go ahead and enter the trade at your £3 per point. Then wait for the trade to play out, win or lose. [Note: This isn’t a trade idea! Just an illustration.]
Or you can do this:
1. Enter the trade at £1 per pip with your 50-pip stop loss and 100-pip limit order to take profits.
2. Place a second trade at £1 per pip with your 50-pip stop loss and 130-pip limit order to take profits.
3. Place a limit order for another £1 to enter a trade at 20 pips higher (just below the high of the day). On this one, you use the same stop loss level as the other two positions, but you don’t place a limit order to take profits.
Let’s say, the trade plays out exactly as you hope.
To start with, the first two positions are entered. And then the EURUSD rallies by 30 pips. Your third position is entered at the higher price. And for a while, all three positions are under water (losing money).
But that’s OK. Remember, you know what your total risk is (130 pips x £1 = £130). That risk is in your trading plan.
Staying with the trade
After this initial rally, the EURUSD suddenly starts moving lower. It reaches your 100-pip target and carries on going to hit the 130-pip target.
The first two positions are automatically closed. That’s £230 in your bank. And you still have your third position in play.
At this point, you can crank your stop loss right down – either to your entry price so that you cannot lose on this third portion (which means you are guaranteed a profit overall). Or you move it lower than that to lock in some further gains – perhaps right down to the initial target price on the first position (100 pips).
Or you might even decide by looking at the charts to move your stop loss to just above a resistance level. That way you can give it a little more room to stay in the trade in case the EURUSD rallies a little (although if hit, you give up a bit of profit overall).
But can you see how this can improve your results?
1. By entering in three “thirds”, you got a slightly better average entry price on your three positions than you would have done by entering one full-size trade at £3.
2. By closing portions of your trade at different levels and leaving others open, you have a chance to stay with your trade for longer for potentially larger gains.
That’s the concept. It’s about trying to squeeze a bit more from your trades. And there are lots of ways to do it.
For example, you might not want to mess around with opening several separate positions as per my example. Instead, you could just open your trade at, for example, £3 per pip and then when it reaches your initial target, take profits on part of the position and leave some to run.
It really depends how flexible your spread betting platform is. If in doubt, ask someone on their help desk and find out.
It’s also fair to say that you won’t necessarily get the chance to enter the final part of your trade at a better price. So in the EURUSD example above, it may not have rallied to trigger the limit order. In which case, you are left with only two thirds of your planned position. But quite often this kind of strategy will work out.
But what is important is that you stick to the golden rule of not betting too much in relation to your bank. Employing a split-bet strategy must not result in you risking more than you should do on any one trade, i.e. 2%-5% of your bank.
Let me know your thoughts – need any more help with this? Anything that doesn’t makes sense? And if you have any suggestions of ways you do this, get in touch at the usual address: email@example.com.
Don’t be afraid to take profits
By the way, when I send you my trade ideas, I tell you the target I’m looking at and the stop loss. That’s what I’m aiming for on the trade.
But if I get a decent move quickly, I may take profits on part of the trade. Or I may move the stop loss to reduce risk. Or both.
But I won’t always get in touch with you when I do that. You’ll need to manage your trades yourself – and in these educational articles, my aim is to help you gain the c0nfidence to do that yourself.
If you see a nice profit that you are happy to bank, don’t be afraid to do so.
How to eradicate “unknown risk”
I talk all the time about managing risk. It’s the single most important concept in trading. That’s because if you don’t keep your risk in check, it could wipe you out.
Some people find it hard to sleep at night knowing they have a trade on that could move violently against them and lose them more money than they can afford to.
That’s why it’s so important to choose your position size, risk/reward profile and stop losses so carefully. But even so, in rare instances a surprise can move a market so far, so fast, that an ordinary stop loss will not protect you.
But that cannot happen with the ingenious little trading strategy our newest Agora recruit has devised.
When you enter the trades this guy recommends, as soon as you place your trade, you lock in your potential reward and possible loss at known and unchangeable levels.
So as an example you might risk £50 for a chance to make a £40 profit (i.e. an 80% gain) on the dollar rising against the euro over the next two days. Or you could be willing to risk £200 to win £160 (that’s clear profit on top of your bet) if the price of gold touches, say, $1,175 at any time in the next 10 days.
I know, these are curious sounding trades (and they are not recommendations I’m making by the way!). But this is exactly how this Pickpocket Trader service everyone’s talking about works.
And whatever trades the guy behind it (the mysterious “Trader X”) recommends, there can only be TWO outcomes at the end of the trade: You can win or you can lose.
But what’s crucial is that you know exactly how much you can win. And you know exactly how much you will lose if the trade doesn’t work out as he predicts.
But this guy is VERY good. And he’s sharing his trades in this service exclusively with Agora members. But only for a limited number – and we’re almost at the limit.
So if you want to get involved… don’t put it off. Secure your place here.
by Darren Sinden
Posted April 24, 2017
by Max Munroe
Posted October 3, 2013