Managing a trade is one of the most important aspects of trading, along with proper risk management and understanding of the charts (analysis/system).
Many traders fear entering a setup, which can be substantially reduced when you apply a balanced and active trade management method.
My approach basically uses four steps, in which I apply different management called loose and tight. The four steps I use are loose-tight-loose-tight depending on the phase of the trade.
On a side note, this article is a continuation of our previous blog posts Insider Tips How to Select & Manage Trade Setups and 3 Live Trade Examples of How to Select and Filter Setups.
Benefits of Active Trade Management
The two main options for trade management are the so-called "passive" or "active" trade management. Here is the main difference:
- Passive management does not change the stop-loss or take-profit of the original setup.
- Active management allows traders to move the stop-loss (only to reduce risk), move the take-profit, or execute a market order exit.
Although passive trade management, also called set-and-forget, can work fine for many traders, I personally prefer an active management style. Why?
Simply because I can use the flow of the price and new candles to provide an updated analysis. The new information allows me to judge whether the setup is still worth trading or not.
The disadvantage of this style is one's trading psychology, which can unintentionally cut winners short and let losses run. Our goal is in fact the exact opposite. I hope that today's article will help with combatting this issue.
Not every trader can apply active trade management due to time constraints. If you do have lack of time, traders can consider trading a higher time frame so they can monitor the charts as needed.
Full Scale Trade Management
I like to apply a mixed approach of how tight or loose I manage the setup:
- Loose: patient at the beginning of the trade.
- Tight: occurs when the setup is in decent profit or if the trade takes too long to develop. Will move stop-loss typically to break even, or a small loss with trending setups, or would consider market exit with reversal setup.
- Loose: now-risk has been reduced on setup, will provide the setup with more space and time to hit the main target.
- Tight: occurs when the setup is close to target or if the trade takes too long to move towards targets. Will either tighten trail stop-loss to lock in profit or choose a market.
Let's take a look at an example.
Live Trade Management Example
A few days ago, I took a short setup on the NZD/JPY 4-hour chart. The trend was down as my long-term moving average indicates (orange is bearish angle).
The price then broke the support trend lines and also pierced through the Admiral Keltner indicator ( part of the MT4 plugin with 60+ features). This was a decent bearish breakout below the support trend line (dotted blue), and it triggered my short setup. I entered (red line) with a stop-loss above the high (dark red line).
Image: NZD/JPY 4-hour chart from 26 October to 16 November 2017
I was patient with the setup, even though the next candle was a bullish pinbar because of these two reasons:
- Was trading with the trend;
- Had my stop-loss above the bigger top.
The next candles price was moving sideways and building a correction. I saw this as a positive sign due to the bearish momentum (orange arrow) prior to the consolidation (blue box).
My patience was becoming thinner as the 6th and 7th candle started to form. I wanted to see a bearish breakout sooner rather than later.
Due to the range, I was anticipating a potential bullish bounce at the new support trend lines (green). I therefore moved the stop-loss (dark red arrow) to above the consolidation and reduced the risk on the setup to about 15% of the original risk.
Soon after, I moved the stop-loss, the price started to break lower and through the support trend lines. With little risk remaining on the setup and the price moving my way, I was in a position to be patient again. A useful tactic now is to let the price run and allow the setup to develop towards your target.
With the next bearish breakouts below the mini flag (purple line), I could further move the trail stop-loss to lock in profit now. Eventually, with this setup, my first target was hit as well (green box with green line).
As you can see with the above-mentioned example, my style is based on the loose-tight-loose-tight approach, which is a personal "recipe" for trade management developed over the years. I think it works best with how the market moves and will share more real live examples in next week's article.
Wishing you happy trading,