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.
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!
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!
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).
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.