How to Manage Your Trades Part 6: Short-Term Trade Management

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In our previous posts on trade management we have utilized daily mecchanical trading systems in order to highlight the usefulness of trade management and how to reason when attempting to build your trade management vehicle. Today instead, we’re going to drop to smaller timeframes and walk through a real trade taken by one of our traders, Sachin Vaze (you may recall him from this webinar).

When reading through the article, I would suggest focusing on a few things:

  • what Sachin’s objective was at inception;
  • when the trade management decisions were made;
  • why they were made.

Real world rules-based discretionary trading can be quite “messy” at times and that’s why the rationale behind the decisions, alongside the overarching objective for the trade, are the only ways to objectively evaluate the end result.

NZDCAD – Nov 29th 2018

The trade is counter-trend, based on an intraweek stretched market and a potential double top in the works. The exact nature of the trade will however remain proprietary. The entry was 0.9124 short.

  • The stop loss is at 0.9140
  • The first target is 0.9082 (1/3 position) which is the current day’s low/Asia low and an evident swing low where buyers were seen earlier in the day.
  • The second target is 0.9050 (2/3 position) which is another evident swing low from the previous day.
  • The combined risk-reward is 4:1

In the chart above we have highlighted the only structural level in between Sachin’s entry and his profit targets that could put up a fight: 0.9100 Round Number. However, Sachin also utilizes Market Profile and was watching these levels also:
  • 0.91338 – 28/11 high
  • 0.9114* – possible support
  • 0.9103* – possible support (minor)
  • 0.9093* – possible support
  • 0.9080 –  Asia session low (TP1)
  • 0.9059* – possible support (TP2)
(*levels identified using market profile)
Another consideration was the upcoming event risk: FOMC minutes. However, Sachin’s entry was during the European morning and since his trade evidently has an intraday nature, he did have plenty of time until the event risk to let his trade play out.

Trade Management Updates

After entry, price holds below the previous days high and after consolidating between 0.9128 & 0.9112 breaks lower to close at 0.9100. Price tried to form a base around the 9100 handle and retraced towards Sachin’s entry. At this point, if price had pressed higher than 9120, Sachin was prepared to scratch the trade.
As it happens, price dipped against towards 9100 and printed a higher low. At this point Sachin moved the Stop Loss to entry with the following considerations:
  • pro – “price could realistically move higher take out my entry. No loss in this scenario.”
  • con – “price takes out position, doesn’t hit  my original stop and then heads lower.”

However, since price  price is in a very strong uptrend, and trading is first about controlling risk, Sachin opted for the breakeven stop.

Price then closes below 9100 on the hourly chart at 0.90915 – 10pips from TP1. At this point the major obstacle (9100) was hurdled and Sachin trailed his stop on 1/3 of  the position to 0.9102 with the following considerations:
  • pro – “locking in 1.4:1 RR on this portion of the trade based on original SL of 0.9140”
  • con – “price continues lower & hits TP1, potentially losing 20 pips on this portion if 0.9202 taken out first”
The decision was based on the fact that the H1 uptrend is still intact and this dip in price could simply be a pullback at this point still.
Based on the revised stop loss of 0.9202, current market price and taking spread into account, this portion of the trade is now at ~ 1.1:1 RR (risking 10 pips to make 11 pips). The following H1 candle opens 1 hour before FOMC minutes and consolidates between 0.9084 and 0.9089 for about 30 minutes.

At this point, with the market having come very close to T1, Sachin closed 1/3 of trade at 0.90875 for 0.6R on revised SL and 2.3R based on original SL.   The logic is as follows: “risking 14.5 pips to make 5.5 more pips just ahead of a market moving event does not make any sense”.
 
With FOMC minutes imminent, Sachin moved the stop loss of the last 2/3 to 9202 with the following considerations:
  • pro – “if price continues higher portion of unrealised profit is locked in”
  • con – “post FOMC volatility could result in SL being hit and price continuing lower to second TP at 0.9062”.
The market eventually moved higher after FOMC, the H1 uptrend remains intact, and price hits revised SL at 0.9202.
Final trade return is 1.7 R.

Key Takeaways

Obviously this example illustrates why short-term trading is generally not recommended for people with a day job:
  • without a good handle on levels and reactions, and a tad of a gut feeling also, trading in situations where 10-20 pips can seriously alter the risk:reward profile of the trade, not only can intraday volatility and rogue news events cause premature stop-outs, but even a trip to the washroom can transform a winner into a loser since timing is much more influential on these low intraday timeframes;
  • staring at the market, babysitting the trade all the way through, is hard on most people’s nerves. This kind of trading requires a hands-on approach but at the same time, without extreme discipline and convinction it is objectively difficult to not “fiddle” with the trade;
  • the counter-trend nature of the trade makes it more difficult to take independently from everything else.

Sachin’s experience shows up in his trade management decisions which are quite instructive.

  • He is always aware of the dynamic R:R profile of his 2 tranches alone and combined;
  • He knows his levels and is not letting the intraday moves distract him from them;
  • He is aware of the event risk coming up;
  • He always knows the pro’s and con’s of each decision and accepts them ex-ante (no regrets).

Without exaggerating, it’s fair to say that Sachin has given us an example of trade management mastery. Hopefully it is instructive as well as entertaining.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post How to Manage Your Trades Part 6: Short-Term Trade Management appeared first on FX Renew.