Trade with an Edge

Trade Management

Trade management consists of the following activities:

Assume risk
Reduce risk
Eliminate risk
Maximise profit

Assume Risk

You assume risk when you enter a trade. The value of risk is the difference between your entry price and the stop-loss.

Before entering a trade the first thing I think about is - what will be my risk on this trade? Factors to consider are:

Is there a logical place to put my stop loss? e.g. the other side of a nearby support/resistance line, trend line, Fibonacci level, or the price level at the X point of a Gartley or Bat pattern etc. Or, ideally, any combination of these.
Will that stop loss take me over my leverage and trade risk limits? Is the risk on this trade going to be too large - or will it, when added to my other open positions, blow my leverage rule? (The general rule I use personally, is to keep my trade risk below 3% of my account and leverage below 5:1).
The next question is - "Is price at a level that makes the risk reward ratio acceptable?" (In my case that means 1:2 or more). If not then I don't take the trade yet. I'll wait for price to reach a level that makes my risk reward ratio acceptable.

The decision to assume risk means you must have accepted that loss already from your account. If you get stopped out for a loss, then so be it. Move onto the next trade.

I never move my stops out wider. Unless of course, I made a mistake when I first entered the stop into the trading platform.

See Trade Identification and Scaling In for further ideas on identifying and entering trades.

Reduce Risk

After placing the trade it makes sense to reduce your risk at the earliest opportunity. On the other hand you don't want to get stopped out with the normal ebb and flow of the market.

This is what I do. I tighten my stops when price gets past the Fibonacci 23.6% of the CD leg. Why? - Very often the 23.6% Fib acts as a Support/Resistance level where price reverses back to the PRZ. When that happens you're pretty much back to square one.

But once past the 23.6% Fib, price is often on its way and that leaves me room to tighten my stop - or, under certain circumstances, move my stop to breakeven.

Eliminate Risk

It is essential to move stops to breakeven at the earliest opportunity. There are many ways to do this - two popular ones are...

Put stops to break even when the price reaches the half way mark between the D point and the B point.
Move stops to breakeven when your original risk has been overcome. So if your stop loss is 30 pips from entry, then when price is +30 pips you put stops to breakeven.

I use very similar trade management rules - when the reversal appears to be going with a reasonably strong momentum. Then I will put stops to breakeven a few pips before either the 38.2% or 50% Fibonacci levels on the CD leg.

However, when price action is particularly slow, I set my stops to breakeven a few pips before the 23.6% Fibonacci on the CD leg.

That's because the 23.6% on CD, although a weak support/resistance area usually, can often be be rollover point for a continuation of the CD leg direction. Then price can either start going sideways in a consolidation, or even continues the CD trend more assertively.

As, in fact, happened with this GBP-CHF bullish crab pattern above

Now we've minimised our risk, it's time to look at maximising profit.

Making a Profit

This is the key reason for trading a minimum of 2 lots. When price reaches a certain level, as described above, the thing to do is take profits on one position, while putting stops to breakeven on the other position.

This way you take a small profit, while effectively getting a free trade with the remaining position.

In the example above, there is a doji candle on the 23.6% Fibonacci of the CD leg, signifying some uncertainty at that price level. When that happens, I set the stop loss of one position to breakeven at that level, (after that candle closed), and take-profit on the other position for a small profit.

On the other hand, if price had driven assertively through the 23.6% on the CD leg, (no slowing down of price action, no reversal candles etc) then I would have set my stops to breakeven at the 38.2% or 50% Fibonacci levels, by taking-profit on one position and letting the other one ride out the trade.

I then trail the remaining position and let the market stop me out. Its the way I prefer as it keeps my emotions out of the equation.

The way I do that is by trailing my stop to a few pips before the previous Fibonacci level. Or to the nearest Support/Resistance level nearby, if there is one.

Alternatively, if you prefer, you can set a trailing stop - which keeps your stop a fixed relative distance away from price.

Either way, this effective trade management technique will ensure your trade is terminated either at a profit that is maximised, or at breakeven, when you get stopped out by the market.

Other pages in this series on Harmonics Basics are: