Tag Archives: managing risks

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

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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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.
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How To Minimize Trading Risks With Stop Losses – Part 1

How To Minimize Trading Risks With Stop Losses

Like any other financial instrument, trading is also game of managing risks. When we put our money into a process to gain profits, there are risks associated with it. Managing this risks the biggest part of trading.

Risk Taking

I trading, traders use stop loss levels to limit their risk exposure in a particular position. However at time we have opportunities which demand extra bit of risk for a major gain. Depending on what is their in our individual trading plans, we usually have few options:

  1. Pass that trading opportunity
  2. Manage risk by either taking an entry at a better level in our favour or placing optimal stop loss levels.

However in certain cases optimal stop losses can not be determined. This series of posts on How To Minimize Trading Risks With Stop Losses is about how to manage risks in these conditions.

Method 1: (Limit Trade Risk By Reducing Position Size)

Lets say I trade with one contract and you have set risk appetite of 50 pips in my trading plan. The trading opportunity that I have demands for 60 pips. I can reduce my position size from 1 lot to a lower contract size to reduce my exposure in that trade.

However this method has one disadvantage. If lets say I was supposed to gain 120 pips in the trade and my trade was successful, I will not profit as much as I could. The over all dollar (cash) profit will be smaller because of reduced position size.

Method 2: (Take a Better Trading Entry in Our Favour To Reduce Risk)

Lets say I want to short a currency pair. It is demanding 60 pips of risk instead of my usual 50 pips risk appetite because I trade with 1 lot. I do not want to follow the method 1 above as it does not give me good dollar profit in my bank.

In such cases, I can wait for the market to come into the zone and wait for a confirmation. Because the price is already there in my risk zone against me, I can take a better entry reducing my overall risk. My stop loss level will still be there where I planned but because I entered the trade late, I will have lower risk.

Wait For Confirmation To Get A Better Entry Price And Reduce Risk Exposure
Wait For Confirmation To Get A Better Entry Price And Reduce Risk Exposure

This method also comes with its disadvantages. The price may just touch the zone and start moving immediately. So I may never get a chance to be in the trade as I planned. It may also never come deep enough into the zone to give me better risk profile that I was looking for.

Method 3: (Adding to Trade Position To Average Down Overall Risk)

Traders also call it Zoning or Average Down/Up or Adding to Position.

This method works with Method 1 and Method 2 above. Initially I will reduce my position size to ensure that I have lower risk profile on the trade but have a guaranteed entry.

Once I have trade running and if it comes deeper in to my zone against me, I will wait for a confirmation and take another trade to average down my overall position. This averages down my overall risk exposure because I took second part of trade at a better price level.

Average Down Your Risks With Multiple Trade Positions Inside The Zone
Average Down Your Risks With Multiple Trade Positions Inside The Zone

This method is only effective if your average of multiple positions is actually reducing risks/reward ratio. So it is essential to set entry levels and position sizes in advance.

Of course as it has few characteristics of Method 2, it comes with disadvantages of Method 2 too. However it comes with advantage of being in the trade of Method 1.

Method 4: (Tail Stops To Actively Reduce Risk)

This method is a very common method and is used by a lot of traders to protect their profits as well as their overall risks. We can use it in conjunction with any methods mentioned above.

I can take an initial position in a trade depending what method I used for my entry. I also have an initial stop loss level set. Once I am in the position, and the price action has started moving in my favour, I start moving my stop loss level too. Moving stop loss level is usually done in certain conditions only. (Moving stop loss levels when trade is going against us, is strongly discouraged as it increases your risk exposure.)

These conditions are:

  1. If the price action has reached our predefined target I can take part of my profits and move stop loss level to a break even position. This allows to me have no loss (break even) if the trade reverses and goes against me.
  2. If the price action goes in my favour and creates a new zone where I can safely my put my new stop level. For example, in a short position if my initial stop loss level above previous swing’/structure high, I can move it a new swing high/structure if price action has created that for me. This allows me to have much safer risk exposure.
Move Stop Loss Level To Reduce Risk Exposure In Trading Position
Move Stop Loss Level To Reduce Risk Exposure In Trading Position

More to come on this series of managing trading risks. Please feel free to leave me a comment or your ideas. I would love to hear from your experiences and techniques.

Have a great trading time.

-Trade Yodha

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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.
---------------------------------------------------------------------------------