Four Stages Of Trade Management For Better Risk/Reward

Four Stages Of Trade Management For Better Risk/Reward

 

Four Stages Of Trade Management In Trading For Batter Risk-Reward Ratio
Four Stages Of Trade Management In Trading For Batter Risk-Reward Ratio

We are in a trade for a purpose and for every purpose there are four stages which realise that purpose. Here are Four Stages Of Trade Management For Better Risk/Reward.

Trade Management is last yet most important stage of a trade. Most traders concentrate on Entry points and others on Stop Loss levels. Picking an entry point and placing stops are far more easier than managing a trade when it is running. They are important in Trade Planning phase but Trade Management stage is the one which fulfils the purpose of trade by realising profits and reducing risks.

Trade Management is all about monitoring and realising profits while reducing risks associated with the trade. There are four stages of Trade Management starting from the point the trade is planned.

  1. Assume Risk (Calculated Risk/Reward)

This stage is the initial stage where we plan the maximum risk that we are planning to take on a particular trade. This come from Trading Plan’s Risk Management and Money Management sections. Usually there are few things that we ask ourselves in this stage:

  1. What is maximum allowed risk per trade in my Trading Plan?
  2. Why my Stop Loss level at this level where it is? Is there any valid rule based reason for that?
  3. What is expected Risk/Reward ratio.

Once decided, we do not change stop loss levels to increase or decrease risk.

2.  Reduce Risk (Moving Stops in our favor)

After a trade is in and started moving in our favor, we must reduce the risk at the first opportunity. But there have to be rules for it. For example: If we are trading a Bat Harmonic Pattern the first target is at 38.2 Retracement and second target is at 61.8 Fibonacci retracement. So as soon as the price exceeds 23.6 Fibonacci level ,we move our stops to in our favor by the same number of pips/points as price action.

3. Eliminate Risk (Break Even)

In this stage we try to break even as soon as the price action has covered half of trading position. We move stops to a half way after taking profits on half of the position. This gives us the liberty to stay in the trade without any risks. If the market reverses and comes back to hit our stops, the worst case scenario will be a Break Even trade.  For example: If we are trading a Bat Harmonic Pattern the first target is at 38.2 Retracement and second target is at 61.8 Fibonacci retracement. So as soon as 38.2 retracement is hit, we close half of the position, move our stop loss level to break even and let half  position run for secondary or extended profits. Here are few Trade Risk Reduction Strategies

4. Closing Trades (Take Profits)

We need to plan this little in advance during trade planning stage. During Trade Planning stage, we decide on Position Size, Risk-Reward and Targets. If there we are planning to have multiple targets in a trade, we must have a position size which is divisible. For example if we want to take two profits targets and trade with 1 contract, we will not be able to close half of that position. So in this case we must trade with two contracts. First 3 stages were more about risk management where as this stage is all about maximising profits without risk. As soon as we break even in a trade, the first priority has to be maximising profits. We can either multiple predefined targets or we can actively manage the trade by tailing stops. For example: in our Bat Pattern Trade example, we can either take profits at 61.8 which was pre-planned or we can continue to tail stops based on a rule based strategy such as formation of structure etc.

Hope this helps. I would love to hear your opinion and suggestions.

Have a great trading time!

-TradeYodha

---------------------------------------------------------------------------------
Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
---------------------------------------------------------------------------------
Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
---------------------------------------------------------------------------------
300 Total Views 2 Views Today
Short URL for this post: http://goo.gl/KAUMdR

Related Posts