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!

active trade management 3

Price pauses and then continues its march higher. By bar C, having broken the swing high immediately 2-bars prior to entry, I was doubting the potential for this trade. Price movement was not acting as I would expect if it was indeed bearish. The pullback duration was taking too long. My intent was to work an exit in order to reassess.

In many cases, if a position is threatened it will warrant an immediate exit. However if I feel that orderflow may offer a way to work a better exit, then I'll seek that opportunity. In this case, price was not moving strongly against my position (more just grinding higher) and I expected there would be at least a short pop lower somewhere in the area of the upper tail of B. This would allow an exit hopefully much closer to the entry, on the first sign of stall.

The mid-close of D confirmed the potential for some bearish orderflow. The stall at E and F were encouraging, as were the continual low volumes during the rally. To be honest though, I had expected a move short to occur quicker than this. There was potential here to have got it all wrong and end up taking a full loss. At this point there is no thought of scratching as the additional risk of a full exit (3 more ticks) is outweighed 2:1 by the potential reward in a breakeven exit. I'll continue to hold and work my exit.

At G we do get the move lower. H continues the move quite nicely. In fact G and H moved faster than I had expected and again raised thoughts of the potential for continuation lower. My target remained at the original target location.

A second chance such as this will not be given much opportunity to prove itself. It either works immediately or I'm out of there!

The scratch is taken after a pause of 5-10 seconds, for a loss of -1 ticks and commission.

At this point I reassess the potential for a new trade in this setup location… quickly ruled out as price moves higher again.

I chose this trade to use as an example, as it demonstrates not only a scenario in which an active trade management process saved a full exit, but also one in which my assessment of trade potential changed a number of times (bearish at entry; uncertain and working an exit two bars later; willing to hold again for potential continuation lower by bars G&H; and exiting on failure to continue lower one bar later).

Everything worked nicely this time.

However it doesn't always do so.

This type of active management is not for everyone (and certainly not the newbies). Many prefer a passive set-and-forget approach in which they just wait for the stop or target to be hit. And that's fine. But if something like the above process appeals to you, give it a go. Be sure to track your stats though in comparing active management exits vs passive management. Ultimately, if it's not making you money, it's not worth doing!

And be patient… decision making will improve with experience and with development of a risk-aware mindset.

Lance Beggs

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  1. Awesome article. I tend to agree. In my limited trading experience ( just started paper trading December 2014) Ive tried the set & forget orders and usually find that when price does move my way, more often then not it usually pulls a U turn and tags my stop loss. Sometimes I’ll return to my computer to see something like a +15 pip move turn around to hit my stop loss. I want to say I am quite happy to have come across YTC material , I feel this style of trading will fit me best. It’s also inspiring.

    1. People usually only need to experience a few trades that run all the way to “just short of” their target, before turning around and moving all the way to their stop, before realising the need for at least some degree of active trade management… even if just movement of a stop to breakeven at some level of open profits.

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