Monthly Archives: February 2012

Sometimes a Free-Trade is Not the Best Option

A trade is termed a free-trade once the stop loss is moved to breakeven, as it ensures that there is no longer a downside risk to the trade; only upside potential. However movement of the stop to breakeven is not always the best option. If done too soon it can take you out of a trade prematurely.

The following is some Q&A with a reader from earlier today which demonstrates this scenario. His trade setup and entry were great. Trade management though let him down.

Email Question:

Hi Lance,

Yesterday (2012.02.22) I took a BOF long on GBP (see attached chart for reference).

I have a couple of questions and would much appreciate if you provide some short feedback on them!

  1. I considered the setup at 17:10 (GMT+2 local time) a BOF long. I was aware that it appears in a trending market condition (downtrend), but I sensed market weakness below the 1.5656 area as the market found it difficult to move to new lows. So, I do not considered the setup as high probability, but also, it wasn’t a risky one (at least that was what I perceived yesterday). Your feedback here is much appreciated!

  2. Trade management:

    1. Market was choppy and overlapping (stalling at the area), so I decided to look for a limit entry order, rather than chase stop entry. I managed to enter at 51 (confident after seeing the bull candle from lows on lower timeframe) with S1 at 43 (two tick below swing L). Target was at swing H at 16:10 @ 1.5671 (4t below that high).

    2. After entry I expected market to test the swing H at 16:55 @ 1.5660 and find some res there, before going further to the target area. As market approached 1.5660 area strong selling came to the market, so I placed the stop at breakeven (BE) +1 in order to protect capital (here I am not sure if this is what I should have done right). Market went down and hit BE+1 to the tick and then reversed :))) Why I decided to be aggressive with moving stop to BE – I decided to be aggressive with that because I didn’t sense this trade as a high probability (given the context – we were still in a downtrend. if market was in a sideways trend, perhaps, I should have given more room to the trade). On the other hand, seeing that market is choppy, I should have expected some volatility around entry and hence, I should have been more patient in placing stop to BE+1. How could you manage such a situation? Just general feedback would be much appreciated. I know that each situation is unique, and there is subjectivity involved, but would be glad to here your thought on that.

Kind regards,

K

free-trade error - email question chart - 5 min

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Active Management and Defensive Exit – An Example

NOTE: Not for newer traders

Thursday 9th February 2012

Active trade management requires a constant reassessment of trade potential throughout the life of a trade, in order to maximise any opportunity and minimise any risk. Here's an example (as best I can recall a couple of hours after the fact).

The tick chart shows the price flow better than a range chart, so we'll make use of that.

The trade plan is for a pullback entry for continuation short. Ideally, given my expectation of strength continuing to the downside, I was seeking a pause in the pullback abeam prior low / ledge A (scenario 1). However I was willing to accept a deeper pullback to the base of the upthrust and trap candle B (scenario 2).

active trade management 1

The pullback continued a little deeper than my preferred plan, but offered an entry in accordance with scenario 2 as mentioned above. The stop loss was placed two ticks above the upthrust bar (B). The initial target was just above the prior swing low (99.50 region) although if price suggests continuation it will be moved lower to allow the trend to run.

active trade management 2

Did I ever mention that I hate scenario 2s!

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