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» Sub-Category Name: Trade Management
 
 
Trade Management
By: From the Global-View Hlep Forum

 

San Diego bobl 15:14 GMT October 24, 2008
Trade Management:

Before I begin discussion on trade sizing, management, and stops, let me say that Richard Dennis and Ed Seykota were phenominal traders. However, studying (I have the original Turtle Strategy trading manual and have studied with Ed) their methods must first begin by understanding that they were "trend following" systems, and by default have fixed mathematical formulas for trade and stop management.

I consider trade sizing, management, and stops all to be fluid dynamics, governed by the character of the market vehicle being traded. I usually begin by asking a (FX) trader..."how much do you risk per trade"? Almost 100% of them reply "I use a 30 pip stop" or whatever. Then I ask "for all FX crosses"? And they answer "yes". It's at this point I ask them... "so, you consider the movement of say EUR/JPY to be similar or equal to USD/CHF"? Then they typically argue that 30 pips is all they can risk using 20:1 leverage or whatever.

The point is......EVERY cross has individual characteristics and trading patterns of behavior. One shoe does NOT fit all. So, the first job of the trader once he decides to take a trade is to define EXACTLY what his/her risk is going to be for that cross.

Here is one method to individually and logically to define that number. It is simply this:
1) take the average TRUE range of the pair for the previous 30 trading days (add 30 individual days of true range, and divide that number by 30)
2) that will give you a number that best represents the true character of the pair in the previous 30 sessions.
3) I take that average number, divide it by 3, and that gives me a realistic level of risk........you give the trade enough room so that noise doesn't take you out, and you don't have a probability of a major hit to your account if it moves against you.
4) Example........ average true range is 150 pips; divided by 3, that equals 50 pips. 50 pips becomes your absolute max risk.

There are caveats to this, and I'll mention a couple, but that alone is a consistant means to define and limit risk. First caveat is that the larger the risk number, the smaller the trade size. You must always consider if the stop is hit, how much in percentage terms is the damage to your account. If it more than your basic rule (2-4% risk max per position or theme), then you DO NOT take the trade OR you find a definitive chart point of support or resistance, and adjust your stop to that level. You must learn basics of patterns, support/ resistance and the meanings/value of moving averages and trendlines. Use these in their simplist terms.

Another thought that usually proves true....... good trades have a tendency to go your way early on. If you open a trade, and it immediately works against you and keeps going away from you, then sometimes it's obvious some other information is in the market, and exiting early could be wise. But, this should be done only sparingly.

Trade management has many forms but I'll mention some basics and then give you one I have found very effective, especially in volatile markets like those we are experiencing now.

We have discussed a stop loss method. Trade management from here is how do you handle a winner. For me, a rule of thumb is this: if you are risking 50 pips in a trade, then when you are in the profit 50 pips, take 1/3 or 1/2 of your trade off, move your stop to breakeven, and by doing this you have locked in a "for sure" profit, and you still are in the trade. A caveat to this is, for instance, if there is a major area/level of support or resistance slightly prior to your target, then take some off there if the market doesn't take the level in strong fashion. If your trade is running for you, and you already have your lock, then leave it alone and let it play out. If by the end of your trading day you have a substantial profit, say 200 pips or so, then I let the trade ride, i.e. hold it over with my hard stop in place. This gives you the chance to hit the big winners which is always an account booster.

Finally, here is a more advanced technique, but one that I have used very successfully, especially in wide range, volatile markets like we are seeing now. This is only for winners that have hit first target. Let me share this method using numbers to elucidate the technique.
1) I have a trade that has run 100 pips, I've taken profits at 50 pips, but then my breakeven stop is hit and surpassed. Let's say it retraces 65 pips. IF it reverses again and begins to move my way again, then at that 50 pip level I put of another trade using 1/2 of my locked profits. Now I am back in. Then, lets say it runs and makes a new high or new low (goes my way), then at this point I add again to the full level of profits taken. Two things can happen from here. One, I ride the trade all the way till the end of trading day, when I make a decision to go flat or let it ride. Or, if it goes back to my stop, then I've cut my profits in half, but still have profits, and I've given myself a chance at a much bigger winner. This simple process has been especially effective in this market.

Hope this helps...... best wishes and good trading.

San Diego bobl

wudangshan kaprikorn 13:01 GMT October 24, 2008
trade sizing, stops, and management; key stuff:

BOBL
....................
dear sir - I will appreciate if you elaborate exactly on these matters - just that amateur traders don't really understand that part -

I read in many books for example that Richard Dennis or Ed Seylota had their algorithms that managed trade sizing - where and how much to put or add/take in a trade

that's why I'm interested in the way the professional traders do it?
for example I might long the bottom and add every 20 or 30 pips and move the stops - but I never actually did it this way cuz once in profit I just like to take./seems the take profit too early, let the loss too much cliche in once again../

thx for the time and effort!

 
 

 



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