Saturday, May 31, 2014

The Trade and the Art of Stepping in and Out

First let me preface by saying that risk management (the trade) is the key element in a successful FX trader. In other words, you can have many winning trades but no profits if the risk is not managed in a systematic way. Every trader has his or her own methodologies in their Trade Management (TM). I won't go into leverage use, slippage, spreads or stops to manage risk as this is my method explained.  Assumptions are the EUR/USD pair and times are NY reference and a five minute chart.

The London 4 A.M. ramp opens the trade (OCO) with a token lot size and I get notified as most of the time during the early morning hours I like to sleep as do most humans. (I'm in the Mountain Time Zone) 

I'll then use my checklist to see if the open trade is a go or not and if it's a go I'll deepen the trade (add lots). What now, you ask?

Look to set my exit points on support and resistance lines (I use S&R and confluence from price action) and if price blows through the first line I take the bulk of the trade off at the next line or resting point. Then I look to exit more at the next line or resting point.  Once the trade is going I move my stop into the money and set limit exits or manage the exits manually. On manual exits I often go down to the 1 minute chart and look for the resting point close to S&R and or confluence from previous price action.

Okay, I can hear you screaming!  Why do you leave so much on the table trading like this. Once the bulk of the trade is taken off, the rest can go to my stop and still book pips.

The bulk exit ratio is about 60-80% and the rest is stepped, limit or stopped out.   Trailing stops are often used for automatic exits as I don't let trading consume me.

Yes, OCO's do open the trade in the wrong direction but my flub ratio is 1 in 20 as you get to know the pair a little better you know where to place the orders.

I'll build on this and talk about Tick and TM (Go or No Go) and also T1 and T2 exits points. Tick is up next. 

More can be found here @BuggyPilot 


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