Risk-free positions are a beautiful thing.
Once your position has little-to-no risk left in it, then it not only liberates you financially, but psychologically as well.
When your trade is risk-free you can focus on maximising profits without fear of taking a loss.
Most of us would love to have more risk-free positions in our portfolio. But to do this requires waiting for trades to go well in our favour, so we can move our stop-loss to break-even.
The good news is there is another way.
A way for you to add risk-free trades to your portfolio, even if the trade does not dramatically move in the intended direction. Or even if the trade does not go in your favour at all.
When it’s good for your trade to go bad
Building a risk-free position relies on the fact that markets don’t move in a straight line.
Markets have a choppy nature. Trading is more akin to traversing a rocky mountain range than cruising down the Autobahn.
And while we spend so much time searching for the perfect entry, the reality is more often than not when we get in, the price goes the other way.
So let’s not fuss and fight. Let’s embrace the market’s topsy-turvy nature.
With a gradual approach to building positions, you might prefer your trade to go against you at first. That way you can quickly build a risk-free position – and perhaps even add some more size to your original trade while keeping your risk well contained.
Don’t go all in (stop trying to be right)
The first key to building a risk-free trade is to refrain from putting on a full position when you first enter.
While this may mean that sometimes you miss out on gains, it will allow you to keep some powder in the keg to add at a lower price.
Let’s be clear here. I am not advocating a martingale approach (doubling up on losses). Rather you are taking a conservative approach by employing your capital at different levels, whist remaining well within your risk boundaries.
You are not trying to be right on your entry, expecting the market to go up exactly when where and how you think it will. You simply acknowledge the nature of the market and trade it as such.
The surprisingly simple method for building a risk-free position
Now that you have some skin in the market and some left on the table, you can begin to build your position.
Start by looking for a key level (support/resistance, Fibbo retracement, daily close etc.) in-between your entry and your stop-loss.
You can then set a limit order to enter at that point. Here is where we might put a limit buy for the second entry if we were trading the breakout on USDCAD.
Alternatively you could wait for a reversal pattern to occur after a retracement, like on this short GBPUSD trade.
Once you have the second position in the market, to build a risk-free position you simply look to take it off again at the appropriate level. Not only have you made your money back, but you’ve also locked it in, and your first position is still running.
This can be done when the price gets near the original entry. Here is an example on a recent EURNZD trade (closing right near the high was a little lucky in this case):
Or you might look for a move past the entry towards a relevant key level. Here is where you might close the second entry on the previous GBPUSD example.
Once the second entry has been taken off, you will now have some profit locked in on the trade.
At the very least, this means any losses will be smaller than your initial risk amount.
You then have some options on what to do next.
You could look to purchase on the retracement again, and rinse and repeat the process.
This is what I have been doing on this EURGBP short trade. If the trade remains within the range, I will have a profitable position even if it eventually hits my stop-loss.
Alternatively, you could trail your stop-loss on the rest of the position to a level where your leftover risk is small to non-existent.
Hopefully you can now see that by employing your capital wisely at different levels, combined with smart profit taking and stop-loss adjustments, you can often get yourself into risk-free scenarios.
But it does not have to stop there.
You can continue to build risk-free positions during a trend
As the trade progresses in your favour, you can continue to trade in an out.
I typically like the market type to turn sideways first, though I also trade around the core position with a small part of my capital during a trend (the topic of a future post!).
This approach takes advantage of the natural tendency for trends to pause and consolidate before continuing on their way.
Here you can see how I have been able to build a risk free position by trading around consolidation periods on the EURCHF.
This approach will give you plenty of flexibility to effectively manage your position both at the start of and during a trend.
Over to you…
Let me close with this.
Too many traders think the key to trading success is picking the direction of the market.
The wise hands know it’s not about the direction, but about how you manage your position. That’s why it’s so crucial that you develop skills like how to build a risk-free position.
Now it’s up to you.
Take out your trading plan and think about you can get yourself into more scenarios where you have little to no risk, yet plenty to gain.