Closing out half the trade - risk management?

I’ve read some threads and posts on here recently that advocate the 2 trades method and then you close out half your position when the first trade has reached a percentage of your target profit.
I fail to see how this helps?
Firstly, on the trades where it goes further you are missing out on 50% and on the trades where you are wrong you are doubling your risk.
Could someone please explain how this is better than just opening with 1 trade?

Suppose I am trading RSI, meaning we buy when the reading goes below 30 and sell when above 70.

I open my trade at a price, say at 1.5000 and my TP is set to 1.5100. That is around 100 pips. I open 2 lots with my set risk percentage so, if my money management says 2%, I divide 1% risk to each lot. So, basically, it is 2% “per trade” and not per lot.

Now, after looking at the chart I see a minor resistance @ 1.5150 from where the price might bounce off. So, once the price reaches 1.5150 I close one lot. And then update the SL of the next lot to 1.5150. In case, the price moves to my original TP, I make a 150 pip profit. If it retraces and hits my SL, I make 100 pip profit.

This is somewhat of a risk hedging “what if the price moves my way but just retraces before my TP”.
I have seen my trades miss TP by 1pip!!! Yes, 1pip and then reverses and hits my SL.

I open 2 lots with my set risk percentage so, if my money management says 2%, I divide 1% risk to each lot. So, basically, it is 2% “per trade” and not per lot.

That makes sense.
However, the methods I’ve seen talk about closing out half the lot and then setting the SL of the 2nd lot to maybe a 10pip profit min and allow it to run or trail it close. You are still risking a loss of 2% if it goes the wrong way and unless you have a 2:1 TP, you might not even make that.
Doesn’t it make more sense to start off with 1 lot, confirm the direction and then strengthen your position by adding an extra lot?

However, the methods I’ve seen talk about closing out half the lot and then setting the SL of the 2nd lot to maybe a 10pip profit min and allow it to run or trail it close. You are still risking a loss of 2% if it goes the wrong way and unless you have a 2:1 TP, you might not even make that.
Doesn’t it make more sense to start off with 1 lot, confirm the direction and then strengthen your position by adding an extra lot?

The trade you put on is 2% risk for the total trade, over your SL i.e 40 pips.

The idea is to remove risk as soon as possible, with out moving it too soon to knock you out of the trade. So at + 20 pips or there abouts, move your stop loss to break even. Now there is no more risk what so ever… it is a free trade.

It is a simple way of banking pips in and growing your account. Taking profit is one of the keys to success in forex. Say your trade goes 70 pips and you still think there’s a bit more to go, and it reverts in the next blink… hits your SL, now you have nothing or maybe suffered a loss. I been trading the GJ so long, I’m used to seeing 50-100 pip candles on the 5 min TF and that can happen pretty regular.

I would be more worried about adding another trade after you think it is going in your favour, as now your entering at a higher/lower price.

R:R ratio is a novel idea, but in reality, its just a number you pick, some experience traders I imagine can be pretty good at it, but for most its just a guess using fibs or what not.

The idea of letting your winners run is what i do believe in, and this is a simple way of doing that.

Yes, you would earn more pips if you didn’t close 1/2 the trade, but then again you also take the chance of ending up with nothing or a loss

If you want to see that example once again. The capture of the RSI move might get me a 200 pips or more. But if, the trade simply reverses after reaching 98-99(on one lot) and my SL being 100 pips, I end up as -200 in my bank.
But, if at some arbitary point, say at 25% of the move(ie 25pips), I close one lot. Then move the SL to 10 pips, even in case of reversal. I end up with +35 pips.
Now compare, which looks better -200 or +35.

The biggest problem when trading is our greed, to capture maximum of the move, max pips. Even the world’s best system can’t tell you how far a move will last. It might move 100 pips or might lose steam after 10 pips.

Closing half a position at a target and allowing the remainder to run with
a trailing stop-loss is a further variant of having two [B]fixed[/B] targets.

However, both this and the original two-target method are extraordinarily
difficult to implement by way of orders on most dealing platforms, unless
you are babysitting the trade. You really have no way of knowing where
to relocate the stop for the remainder unless you analyse the price action.

Using a fixed stop for both halves is easy (2 OCO pairs), but it defeats the
object of the exercise, somewhat ! Were the market to reverse on you, you
would be wiped for one half at the original SL which could nullify, or
severely reduce, the profit taken at target on the first half, depending on
your risk:reward regime.

If anyone comes up with a foolproof methodology for automating a two-leg
trade like this, using only conventional OCO pairs, I would love to read
about it ! ! !

Chris

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Chris, as I said no full proof methodlogy is there to estimate the price movement. Plus, I think a severely reduced profit is any way better than a huge loss.
It is just a matter of personal choice, if you have enough and can take drawdowns, why use SL at all? Let the price take its course. ( A point always raised by MP, one of the former members).
And there are some EA to execue the moving of stop loss , you might find them over ff.

If we assume a 50:50 trade win:loss scenario, ie 50% of your trades go in your direction, the other 50 go in the direction of your stop loss and hit it.
With this close half lot methodology, this is a loser. 50% of the time you lose your whole lot of 50 pips. The other 50% you make 25 pips (half of the 50) and +10pips (halved = 5 pips) so a profit of 30pips. The strategy relies solely on your winners running well beyond your original TP.
The fact that you may be winning 80:20 in your trades is what makes the method work. And in that case, you’d be better off just closing full lots at target profits.
?

I’m afraid its really not that simple. Your not including the trade management factor. My whole approach to trading is to remove the risk as soon as possible. So at +20 pips, the SL goes to BE… It may never hit my 50 and occasionally it goes the total wrong way and hits my SL before I can move it. hey this is FX anything can happen;)

Of course you would be better off closing the trade as a whole at the profit level, but how can you tell where that is?? how do you know its not going to go up 100 and then down 200… or keep going up for another 1000… or go up 52 then down a 1000… what method are you going to do to find where to let the trade run?? TS? sure if you want to get knocked out of the trade before it gets a chance to go… far better to leave your SL at +10 and set no TP… and see what happens especially if your are with the trend… you can wake up to 3-4-5-600 pips or 10…

Taking profit often is a way to keep your account growing. I find his method gives me piece of mind, and once the 1/2 is closed, I dont worry about the rest. Its all in my mental state, and that allows me to let the remaining trade run.

Once you’ve been trading a while, you might see the advantages of this.

Frankly, if your trading is 50/50 than in my opinion your doing something drastically wrong.

I agree this takes the risk out of it if the trade goes the right way but I was using the 50:50 as an example to see if the method alone grows your account and I’m not so sure it does based on a 1:1 R:R ratio of 50 pips. The thing that grows the account is the good trade judgement and the running winners isn’t it? :slight_smile:
You could quite easily set the SL to +50 pips as soon as it hits TP of 50,
or maybe +25 at 50, then +25 at 75 and then leave it, it might run, it might not but you’ve made a 1:1 using trade managament and good trade judgement for the entire lot rather than half of it.

Also, you do +20 at 20pips - doesn’t that get stopped out lots?

I’m just discussing this and arguing the point so I can get some understanding as at present it seems good in principle but I’m not 100% with it yet :slight_smile:

I’m all for a good discussion…

Trade managment really is a discussion in itself. Once the trade is +20 pips, the SL is set to break even, so there is still 20 pips breathing room so to speak and price action can move up or down. If i get stopped out I won’t lose anything, nor gain anything. At this point, there is no more risk involved with the trade, its a free ride.

This is a judgement call, and depending on the volatility can change.

Using the 15min TF trending method i posted in the other thread, in general no it doesn’t get stopped out alot. The entry of the trade is the crucial part if you want to use a small SL on a volitile pair.

I chose 50 pips because it is relatively easy to get and is substantial enough
reward. You could really target any value you want here.

Th real problem with new taders in my opinion is greed… you want that extra 5-10-15 pips, so you end up holding a winning trade to long and then becomes a losing trade… I learned this from myself, cause I did that very thing.

One thing i learned from that, is that the trade can go against you at anytime, so the more pips you bank, the better off you will be and your account can grow quite nicely. The trades that run are what produces the real big gains.

R:R is an idea, but in practise it is really meaningless. What counts is are you gaining or losing pips? knowing why you took a particular trade, and having some idea where it will end up.

Ok, that’s trade management and R:R covered :slight_smile:
Now, suppose we take 50 pips (your example).
You close out half the trade at 50 (effectively an immediate 25 pip profit).
You set the SL to + 10 (effectively an immediate 10 pip profit).
Your absolute minimum profit from this trade if the PA comes back to hit the SL is 35 pips. You could win a substantial amount if it runs but at only half your lot.

Instead of closing out half the lot at 50 pips, could you not by the same principle set the SL to +35 pips. If the PA now runs, you make double what you would have done if you had closed out half the lot and you still have your guaranteed 35pips.

Yes, you could do it that way too. Its what ever works for you. For me, I consider the second half of the trade a bonus, so mentally i dont worry about it. Its all in the mind and what makes it easy for you to trade, this is what works for me. There is no right or wrong way to do it.