Trade Management Complexity

Hello Forex traders,

Last week’s article spoke about triggers and entries. Many retails traders spend a considerable amount of time with testing the best entries and triggers… however a lot less effort is invested in finding appropriate stop loss placement and trade management rules.

As Nathan explained in his article earlier this week, “the problem with an entry strategy is that there approximately 2.78 Bazillion of them and, in themselves, they don’t make anyone a profitable trader.”

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Our TOFTEM model provides a method to analyze whether the required environment of a trading plan matches up with the structure of the market. Now it’s time for the next phase: trade management.

TRADE MANAGEMENT BASICS

After completing the analysis in TOFTEM, it is the trader’s next task to setup a trade management plan. Remember that successful traders can enter the market at almost any time and price level and still exit the trade without serious harm and probably a decent profit. Whereas beginning traders sometimes could enter at the best spot possible, but still manage to unsuccessfully exit.

Trading success is only determined by entering and exiting appropriately, which explains why trade management is so vital. The main motto is always “plan the trade, and trade the plan”. Or from a different perspective: Winston Churchill famously said that “he who fails to plan is planning to fail.”

The trade management plan could be:

1)      None: when there is no trade management, then this is called a “set and forget strategy” where the entry and exits are pre-fixed without any intervention during the trade

2)      Discretionary management: this means that the choices in the plan will be decided on per trade basis. Even though the choices can vary, it is advisable that traders at least use the same tools for their discretionary decisions.

3)      Non-discretionary management: this means that the choices and tools in the plan are always the same.

In any case, always make sure that you do have a specific trade management plan prior to entry of the trade.

The key elements in a trade management plan are:

1)      Stop loss placement: having a stop loss is vital to protect the trading capital account and limit the risk to a pre-defined level. Please read more here on this topic.

2)      Take profit placement: having a target in mind where price has a decent chance of non continuing increases the reward perspective. Please read more here on this topic.

3)      Entry: each trade needs to be entered obviously. We are looking for a number of entries that roughly match with the expected entries. If that number is too low, then too many opportunities could be avoided. If that number is too high, then too many opportunities might be traded and the trader is over trading and chasing the market most likely. 

Both the entry and exits can be executed via pending orders or market orders. The choice will depend on the strategy a Forex trader employs: a swing trader can easily use pending orders whereas a scalper could opt for market orders. In most cases a pending order is preferred as it allows the trader to fully plan a trade prior to entry. A market order also has a higher chance of being triggered by emotions (fear, greed, impatience) of the Forex trader.

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TRADE MANAGEMENT PROS AND CONS

The above items are the basic premises of any trade. It will depend on the strategy of a Forex trader whether more trade management choices and elements are added.

Certain strategies are “set and forget” type of strategies. Once again, this means that a trader monitors the charts for a trigger and entry and once a trade has been established, they either let the price hit their stop loss or take profit level.

Other strategies allow for management of the trade between entry and exit, which is why it’s called trade management. How much management is required will depend from strategy to strategy. However a trader always has to make sure that the intensity of the trade management is executable within their daily schedule.

Here is a list of advantages of intensive trade management versus no trade management. First of all the advantages:

1)      Trail stops allow for losses to be kept small, and profits to run;

2)      Trade management allows traders to support any problems with trading psychology. For instance, various take profit scale outs could help the trader in staying in the trade;

3)      Spread entries allow traders to wait for multiple confirmations.

The advantages of no trade management:

1)      Requires less time and attention to manage;

2)      Complex trade management can cause mistakes or confusion;

3)      Active trade management can cause traders to “over” manage.

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TRADE MANAGEMENT ADVANCED

With the comparison completed, let us now briefly summarize the various trade management options a trader can opt for. Needless to say that a trader never has to implement all of the options mentioned in this list, but they can choose variable combinations.

a)      Trail stop losses: cutting losses short and letting winners run can be best achieved with trailing stop losses. The trail stop loss could be fixed for the entire trade, but it can also vary during the trade by size, tools and closeness. Some traders like to use a tight trail stop loss when price is closer to their target zone as to reduce the risk of giving back bigger sums of profits. Please read more here on this topic.

b)      Time factor: having an idea in mind when the trade should materialize is important because exiting too early will undermine profitability, whereas staying in too long will not allow losing trades to be cut short. Please read more here on this topic.

c)       Scaling in and scaling out: the ability to enter and exit at multiple spots allows the trader to enhance reward to risk ratios and to trade with the newest price action and chart patterns information. Please read more here on this topic.

d)      Moving your SL to breakeven: this element is similar to a trail stop loss, although the  stop loss is not moved to a technical level or tool but to the entry spot, which is usually a more ad random spot. Moving to break even has a positive psychological effect but in most cases the trailing stop loss is better for the trade development.

e)      Mixing trade management elements per trade: a trade could incorporate a mixture of entries and exits, but also a mix of stop loss placement, trail stop loss, and trail stop loss method and size. For instance by using a tighter stop loss and the other part a wider one creates a trade setup that has different reward to risk ratios and win percentage probabilities.

f)       Having a soft target zone: when a trader establishes a target zone, they can do choose to implement a hard take profit level, and/or start using a trail stop loss, and/or use a tighter trail stop loss.

With trade management and letting a trade develop the absolute key is to display patience and discipline. Changing any trade management plan after the entry should be avoided to limit the negative impact of trading psychology on the long-term consistency and implementation. Altering a trade after the entry is OK, as long as it is within the parameters of the trade plan and trade management plan.

What is your view on trade management? Do you use it actively or are you using a set and forget strategy? Or both? Let us know down below!

Thank you for sharing this article and wish you a grand weekend!

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Chris is the head of the mentoring program and trading room at Winner's Edge Trading. He has a passion for technical analysis and helping Forex traders achieve their goals in trading. Chris has been trading for almost 10 years and is most fond of the Double Trend Trap (as a strategy), moving averages (as an indicator) and Fibonacci (as a tool).

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  • Chris

    Hi Fabrice! Thank you for your feedback!! Much appreciated :)
    Very important topic and the choices certainly will depend on type of strategies and trading psychology as well :) Over managing a trade is definately something that needs to be avoided. Thanks and cheers! Chris

  • Fabrice Goeyvaerts

    Hi Chris,
    Trade management is clearly one of the biggest key in trading. Net result of a trade is after you EXIT not when you enter.
    I don’t manage a lot when I’m in and so prefer a set and forget strategy. Like Nathan repeated so many times “Don’t kill the profit potential by having a too tight SL”.

    Tks for the info. provided in this article.
    Cheers,
    Fabrice