Aloha Dudes and Dudesses,
Without a doubt, one of the greatest concerns for traders is when and how to exit trades. There are a couple of set and forget techniques that I’ll share at the end to round out the picture, but what I’m about to share on how and when to use various trailing techniques for active trade management is based on my number one takeaway from an eye-opening (for me) article by Rayner Teo: How to Set a Trailing Stop loss order, to Protect Your Profits and Ride Big Trends.
My biggest takeaway is that it makes a lot of sense to shift trailing techniques based on current price action.
What you’re about to read is a modified copy of my notes. To get it from the horse’s mouth (no offense Rayner ) - read his article. What’s in parentheses are my additions. And of course, this is not an exhaustive list.
EXITS WHEN MANAGING TRADES
PRINCIPLE: CHOOSE BEST TRAILING TECHNIQUE, OR SHIFT TECHNIQUES, BASED ON CURRENT PRICE ACTION
WHEN TO . . .
TRAIL SWINGS. Where market has clear pullbacks in a trend, trail behind swings.
TRAIL MOVING AVERAGES. If price action isn’t clear, trail behind a moving average (or Bollinger band, etc.).
TRAIL X NUMBER OF CANDLES OR A SERIES OF TRENDLINES.
If price goes parabolic (sharply curves upward or downward & candle ranges increase) moving averages will lag way behind, so can trail behind . . .
A) X NUMBER OF CANDLES: 1, 2, 3 , etc., - or shift the number of candles based on candle size
B) OR A SEQUENCE OF TREND LINES AS PARABOLA PROGRESSES.
ATR. TO TRADE “SYSTEMATICALLY" (as opposed to shifting techniques based on price action) trail by a multiple of ATR behind the tail. He suggest 1, 2 or 3 ATR.
WHAT FOLLOWS IS TOTALLY MY ADDITION:
SET & FORGET EXITS
- SET A PROFIT TARGET
SET A STANDARDIZED REWARD:RISK
Per How to Calculate Risk/Reward Like a Pro - My Trading Skills, “Trades with R/R ratios of 2:1, 3:1 or even 4:1 have shown to be the most effective setups in the market.” (Advantage over ATR: It’s specific to the price action that determines the stop loss, which in turn, is the basis of the R:R. - I must add that no less of a trader than Kathy Lien says, concerning even 2:1, “The market is not always that generous.” Some successful traders say they get the best results with 1.5:1. So, the ball’s in your court.)
SET A PROFIT TARGET WITH A MINIMUM R:R RATIO BASED ON PRICE ACTION (AS OPPOSED TO SETTING, E.G., 2:1 ON EVERY TRADE.)
- TRADE THE DAILY TIME FRAME OR HIGHER. Trading these frames is not strictly Set and Forget, but with the daily, one just needs to check and manage his trade once a day, which is pretty darned close.
Well, I hope this helps some.