Managing winning trades is an area that I would like to improve on and has been a major focus of mine lately.
I used the search button and was able to find lots of great info and advice on this subject, so please forgive me in advance if the question I have has been covered.
I’ve received some constructive criticism from a friend/fellow trader about my reluctance to add to a winning position.
A number of successful traders, including many experienced and well respected traders on this site recommend scaling in to winning positions as long as it is done correctly.
A common ex is as follows. Im also not taking spread into account for simplicity:
You go long 10 lots @ 1.500
stop loss @ 1.400
when price is @ 1.600, you add 10 lots to your position and move s/l to 1.500. You gain profit potential while keeping risk the same as it was at initial entry.
price moves to 1.700. You add another 10 lots and move s/l to 1.600. You incease profit potential and have created a risk free trade.
Repeat until you are able to lock in profit while continuing to improve potential upside.
I understand the logic, but this is my concern. When price hit 1.600, if you move your s/l to 1.500 w/o adding to your position, you create a risk free trade. You lose upside potential but minimize risk. I inderstand that if you enter an additional positon @ 1.6 and move your s/l to 1.5, you increase upside while keeping risk the same. However, the hardcore risk manager in me sees it as passing on an oppurtunity to minimize risk by moving your s/l to 1.5, w/o adding to your position. Even if you add 5 additional pips instead of 10 at 1.6, your risk is lower than initial risk, but you stil miss a chance to create a b/e situation
My priority when trading is to minimize risk. I am willing to sacrafice potential profit in exchange for lowering risk but I refuse to maximize potential profit if it increases risk.
Is my logic flawed, and if so how? Any advice or opinions would be appreciated.
The flaw is that you have initiated the trade presumably using TA, then abandoned this out of fear of losing - losing either capital or unrealised profits. So you started off with a rational objective trade, then moved to managing your position only through fear. You surely can’t believe fear and other emotions help you as a trader?
However, as your initial SL is such a round number below entry, at exactly 0.100 lower at a round number, 1.400, I also suspect your initial SL is not derived from TA but from loss prevention. This is a mistake and means your gains/losses will become random. That’s not the point of trading surely?
I set my S/L a few pips above or below a major S/R level. I used round #s as an example for simplicity sake.
I agree that trading under the influence of emotion, esp fear, is something that should be avoided.
In the scenario I used as an example, I dont think fear was a motivating factor. I think the motivating factor was a mindset of aggresive risk reduction.
Thanks again. Your advice is much appreciated as always.
But there are two types of decisions driven by fear - instinctive and rationalised. Instinctive is when you see an unexpected profit and click the Close button, for fear you’ll lose the profit. Rationalised is when your strategy requires you to set a Limit Order to close the position, and so you do, and you walk away from the screen until tomorrow. But its the same fear.
Thank you for your feedback. Point well made and I agree.
I dont use a t/p, so I usually let a winning trade run as long as possible. If price reaches a new s/r level, I adjust my s/l accordingly and will let the market take me out.
Besides scaling in, do you have any tips, methods, or additional thoughts on managing a winning trade you’d be willing to share?
I suppose it depends on how you look at the risk. Assuming you use suitable starting risk, you can afford to lose a lot of trades. If the trade had a 100 pips stop and by the third time adding, it was up 400% of risk and you’d be gaining 300% risk per 100 pips, if a few 100 pips more and your hitting a profit of close to 15x what you risked. So when it comes down to it, the risk assessment is really do you think the strategy would be able to do this at a suitable ratio ? If it could hit 1 out of 10 tries, it would be very profitable.