The following is some recent email Q&A regarding the management of part-two of a trade (all-in scale-out), following the exit of part-one at it’s target.
I just started demo-trading and I’ve found out that I have absolutely no idea how to manage target two. I trade GBPUSD 30min/3min/30sec.
I like the idea of having two targets and thought it through and I believe it is better concept than single target, but I don’t know what is the logic behind managing the stop just after I hit T1.
I can’t leave it too far behind, otherwise the trade would often result in less than 1:1 R:R (1 on T1, but 0.7 on T2 for example). I can’t follow the price too close, because T1 is usually at a place where some opposing order flow will come and there is reasonable place where to put the stop.
What I’m interested in is the logic behind the stop management of part 2. I understand how to manage the first part and where to put T2, but I don’t know what to do with the stop at the moment I hit T1.
Thank you very much for explaining it to me.
Wish you good luck in trading,
Have another read of the three part article series, The Importance of Exit Strategy:
- Part 1: http://yourtradingcoach.com/trading-process-and-strategy/the-importance-of-exit-strategy-part-1/.
- Part 2: http://yourtradingcoach.com/trading-process-and-strategy/the-importance-of-exit-strategy-part-2/
- Part 3: http://yourtradingcoach.com/trading-process-and-strategy/the-importance-of-exit-strategy-part-3/
What is of great importance, is the understanding of the fact that fixed rules do NOT work, and you will NEVER perfect your exit strategy.
Take note again of the following from part 2:
“Case in point – Larry Connors, co-author of ‘Street Smarts’ with Linda Bradford Raschke, recalls in that book a retired friend of his who made over $100 million trading futures who stated that his biggest weakness was that he never mastered his exit strategy.”
As a generalisation, I would say that the default action upon achieving T1 is to move the stop for P2 to breakeven, if it’s not already there. However really this depends on your assessment of the current environment and the likely nature of price movement from this point on.
It may well be in some cases that you expect a retest of the initial entry point to be possible, meaning therefore that the better option in that case is to leave the stop slightly wider.
Subsequent management will involve either leaving it for the target or stop, providing the premise remains valid. Or trailing the stop beyond structural points of minor s/r (swing highs & lows).
The only rule is that any trailing stop must be at a place where you consider the trade idea is no longer valid. Any closer, is too close.
You mentioned as well in your email that you may expect some opposing orderflow at T1 which will result in a pullback. Yes you will get that often, but not always. If you assess it as likely, then another option is to exit both positions at T1 and then seek a re-entry of P2 at a better price on pullback.
A few other things that might help:
Keep the majority of focus on the trading timeframe rather than the lower timeframe, to avoid overreaction to any lower timeframe price movement.
When faced with a decision regarding movement of a stop or target, consider how you will feel if your expectations aren’t met. Say for example you’re unsure about whether or not to move the stop up tighter. Consider your feelings if you do that and get stopped out of a trade that would have won. Then compare this to the feeling you’ll get if you don’t move the stop and end up giving back more than you should have. Which feels worst? Take the other option. (This was a tip I picked up from one of Denise Shull’s blog posts, emails or webinars (I think): http://traderpsyches.com/).
Expect disappointment. Expect underperformance. Accept that there will be many times when you are stopped out and the price goes on without you. Accept that there will be many times when you keep the stop too wide and give back more than necessary.
Track results. Maybe you’ll find that you over-manage too much, or are too quick to exit. Perhaps the stats will show that you’re better off using a passive management strategy and just holding all positions for either the target or stop. It’s not how I like to trade, but there’s nothing wrong with that if you’re skilled at assessment of environment and selection of entries, stops and targets. It may well be the best management style for you.
I hope that provides some assistance.