“How a trade is implemented is more important than the trade idea itself.” – Colm O’shea, Market Wizard

 

“It’s not about being right, it’s about making money.” – Scott Ramsey, Market Wizard

 

“I scale in and scale out of my positions, so that I can spread out my risk.” – Tony Saliba, Market Wizard

It’s the ultimate Forex traders’ dream: Have a big position on a trade that goes your way, and get out with a large profit. And with all the large moves in the Forex market, it should be easy, right?

Turns out it’s not as simple as you might think. To manage risks on a large position, and then to get out with your profits before the market reverses, requires hard work – and lots of it.

The good news is there is a technique to it. There is no need to put on a large trade and “hope like hell” that is goes your way. Instead you can use trade management rules to build a position while limiting your risk, and then to hold onto your profits when it comes time to exit.

This is the crux of how you, as a retail trader, can grow your small account into a big one. It’s by implementing trade management techniques that let you build a large leveraged position while minimising risk that provides you with the opportunity for big profits.

These techniques involve:

  • Scaling into a position
  • Scaling out of a position
  • Re-entering into a position
  • Trading against a core position
  • Building a risk-free position

Advanced trade management techniques work hand in hand with the complex exit strategy in lesson 12. Both this lesson and lesson 12 are focused on managing your position after the trade is placed. Your position sizing model from lesson 7 is also inextricably linked to your trade management techniques.

Don’t try and be 100% right when you trade

“You have to trade at a size such that if you are not exactly right in your timing, you won’t be blown out of your position. My approach is to build a larger size as the market is going my way. I don’t put on a trade by saying “my god this is the level; the market is taking off right from here.” I am definitely a scale-in type of trader. I do the same thing getting out of positions. I don’t say, “fine I’ve made enough money. This is it I’m out”. Instead I start to lighten up as I see the price action or fundamental changing”.” – Bill Lipschutz, Market Wizard

 

“Don’t try to be 100% right.” Joe Vidich, Market Wizard

By using a series of structured entry and exit points throughout the trade, you don’t have to be 100% right on your timing.

You simply have to be right on your idea. Of course, if you are spot on with your timing, it can be helpful, but it’s not necessary to win big in the market.

Once you have an idea and the price action is in alignment with it, you can then start to develop your position. If you are right and price action continues to confirm your idea, you can continue to grow your position to a meaningful size.

If you are in a position and you sense that the market is about to turn, you can begin to lighten your position. If you are wrong and the market continues to be favourable, you still have skin in the game and can rebuild your trade, if you are right and the market turns, you can continue to lock in profits.

Contrast this with a single position approach:

  1. If you take a full sized position and lose, then you will have lost the maximum amount.
  2. If you take all your profits in one go, and the market continues in your direction, you have broken one of the cardinal rules of trading, and cut your profits short.

In particular, this approach is suited to the retail trader. It allows you to focus more on your position sizing and risk management, which is one of your edges over larger market participants, and less on being right on the particular timing which is a challenging skill to master.

Implementation is more important than the trade idea itself

“Having a beautiful idea does not get you very far if you don’t do it the right way.” – Colm O’Shea, Market Wizard

It’s not about being right, it’s about how much you make when you are right.

Have you ever picked a trade perfectly, and then not done anything about it, or taken only a small position, all the while the market did exactly what you thought it would?

Your problem was implementation.

Many of the Market Wizards talk about how implementation of the trade idea they have developed is more important than the trade itself. If you have a good idea but fail to capitalize on it, or to effectively manage your risks, then the idea itself is pretty worthless.

The concept behind advanced trade management techniques is to implement trade ideas skillfully, based on your own trading objectives.

When you enter into a position, plan ahead on how you are going to generate the most profit you can from it. Ask yourself some questions:

  • What is the current market type, and how can you best build a position in this market type?
  • Do you need to scale into the position quickly as you expect it to get away from you? Or can you take your time to build the position?
  • Are there any points along the way to your profit objective that you want to take profit and then re-enter?
  • Where are the likely opportunities to trade against, or hedge your core position?
  • Is there a way to build a risk-free position if the price chops around near the entry for a while?
  • How will you manage risk to both your starting capital and profits gained during the trade?

With experience you will be able to implement your trade in a very advanced manner.

 Scaling in with low risk entry points

“The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you are making a good profit… The way to attain truly superior long-term returns is to grind out until you are up 30 or 40 percent and then if you have the convictions, to go for a 100% year. If you can put together a few near 100% years and avoid down years, you can achieve really out-standing long-term returns.” – Stanley Druckenmiller, Market Wizard

While there are a number of ways to profit from the currency market, one way is to take a big position and ride it hard. If the market goes for you and you are highly leveraged in the right direction your profits can be grand.

Of course this is the goal of scaling in: To build a large position so that if the market moves in your favour it will generate a significant profit.

Scaling in to a position is when you take place a number of trades over time and at different prices with the goal of building a larger position.

By taking a small initial position, that if it goes against you, causes a negligible loss then you are protecting your core capital.

As the trade goes for you, you can add positions and you have the profit from the original position to cushion you from any fall in the price of your new positions, which keeps your overall risk on the account at a manageable level while at the same time keeping you in the running for massive profits.

To do this, you would generally keep your initial position as only a small percentage of your maximum position size. For example if you have a maximum trade size of $100,000 then your first position might be only $10,000 (depending on your conviction on the trade).

You would then continue to add trades until you reach your maximum position size. For example, you could add trades until they reach your maximum position size of $100,000. You could do this in 10 lots of $10,000, or try to reach the maximum position size relativity quickly after 3-5 scale-in points, or another variation that suits your objectives.

Stalking scale in points

You can develop many different formulas for scaling into trades, but one of the best ways to do it is to stalk low risk scale in points like you would low risk entry points.

For example if the price breaks though key levels, you get a pull-back and reversal candle in the direction of your trade, or you get some news that is supportive of your position then you can add additional positions to the trade.

There is no need to be complicated about when you scale in, the most important thing is to have a plan and to follow it.

Combining your position, or using multiple stop-losses

As you scale into positions, you have some choices to make about where to place your stop-loss. You can:

  • Treat each new position as an individual position with its own stop-loss
  • Manage the risk on all positions together with one combined stop-loss

If you treat each position separately, you may end up being stopped out on some of your scale in entry points, but you will not suffer such wild swings of your equity throughout the trade. Plus, you could end up still holding your original position when you would have been stopped out of it if you were combining the risk management together.

Managing the risk together with one stop-loss is the more aggressive option, as it will mean you will generally end up with a larger position if the trend does go your way. For example, you might move the stop-loss so that, at any stage, you are risking no more than 2% of your core capital on the entire position.

Scaling out of a position

“Hopefully I spend the rest of the day enjoying positions that are going in my direction. If they are going in my direction I have a game plan for getting out.” – Paul Tudor Jones, Market Wizard

 

“If it re-enters its base I have a rule to cut at least 50% of the position.” – David Ryan, Market Wizard

Once you have carefully crafted your large position using a scale-in methodology, you may not want exiting out of it to be an all or nothing decision.

Again, it comes down to your psychology. If there is a tremendous pressure to be “right” about where you exit, then you are highly likely to make mistakes and cut your profits short or “hold on and hope”.

Instead, if you have a series of exit rules, and you use them to appropriately scale out of parts of your trade, you don’t have to be perfect on your timing to farm profits from the market.

This allows you to lock in profit when the probabilities are on your side, while at the same time keeping money in the market in case it really goes for you.

You can see on the chart below that you can take off a percentage of your position when the market gives signs it is reversing.

Re-entering into a position

Sometimes you exit a position, and based on market action, you want to get straight back in. At other times, you might take profit and look to re-establish your position later. To do this you can use a re-entry methodology.

Re-entries are used in two circumstances:

  1. When you close the entire position
  2. When you close part of the position

If your stop-loss or trailing stop for your position is hit, then you will be closing your entire position, but often stops get hit and the market reverses in your favour. In this case you can choose to either re-enter the whole position, or to start to scale back into the original position.

When you take profit, you might look to re-establish part or all of your position at a better price. As the market does not always go in a straight line to your objective, this strategy of selling at key levels and waiting for a pullback can work very well. In fact you will find a lot of “old dog” traders who use this as their primary strategy.

Trading against and hedging the core position

Trading or hedging a core position is really about your trader mindset.

When it comes down to it, exiting part of your position has the same real effect as trading against or hedging a position. If you are short 10 lots and you buy 3 lots then you are net 7 lots short no matter if you have established a new position, closed some of your original position or placed the trade as a hedge.

Confused? Don’t worry too much: it’s a tricky concept to grasp (and I did call this lesson “advanced” trade management techniques).

What you really need to know is that, for some traders, opening a trade in the opposite direction to their core position can be a good thing. Much of it is about comfort and attention. If you have a big cushion of profits, it should give you confidence. If you have a large winning position, you are likely following the currency pair very closely and will have developed a strong sense of its ebb and flow.

This means you could be very good at picking spots when it’s going to go against you. So why not place a trade?

There is another significant benefit of trading against the core position. If you generate profits from the trade, you can then use them to add more size to the original position. This is one way of building a very large position for a trade.

Hedging with cross-rates

Another tool you have at your disposal for managing your trades is the ability to hedge your core position with a cross rate, thus converting your trade into a synthetic position in a different currency pair.

You might do this to hedge against short-term weakness in the base currency of your trade, or benefit from temporary strength in another currency.

For example if you are short the AUD/USD for the long-term, but are wary of USD weakness over the short term, you could buy GBP/USD which would give you a synthetic long GBP/AUD position. This means you would benefit if the GBP was stronger than the USD for the period of the hedge.

Building a risk free position

“I can get hit when I have been getting paid, but it’s hard for me to get hit from a standing start. That is key.” – Scott Ramsey, Market Wizard

Imagine if you had a large position in a currency pair that would benefit you greatly if it goes your way, but has little to no risk if it goes against you.

Would be nice wouldn’t it?

Building a risk free position relies on the fact that markets don’t always take off straight away in your direction. Instead, it often chops around a while before finally giving way to a trend.

If you have conviction that the currency pair is going to move in a certain direction, then you can start to place long and short trades within the choppy movement around your entry. For example, you might go long 3 lots, and then short 3 lots then long 4 lots etc. on each short-term reversal.

As you accumulate profits you can start to trade a bigger size, offsetting your risk with the profits, and with some luck eventually getting to a point where your profits more than cover any risk you have on the trade – a risk free position.

Market type identification is important here.

If you have a view, and the market type is sideways, you can then start to build your position. Once you get the move in your anticipated direction, then you can use the profits you have already generated from the sideways price action for your trade.

Tying it all together

“As I continued to incorporate more “expert trader rules” my system became more compatible with my trading style.” – Ed Seykota, Market Wizard

You can see here how all the entry and exit points we have outlined in the lesson come together in a trade on the AUD/USD.

  1. You use the sideways market type to build a risk free position.
  2. Once you get the breakout, you quickly scale in on the first part of the move.
  3. As the price starts to reverse, you take profits.
  4. Before adding the position back on as the original trend resumes.
  5. You trade against the core position before closing out as the trend resumes

Of course at some point you are going to need to close the position completely, to do that you would use your complex exit strategy from lesson 12.

Time to get out your trading plan

“You need to develop a plan of your strategies for various contingencies…By having thought out your objective and having a strategy for getting out in case the market trend changes, you greatly increase the potential for staying in your winning positions.” – Gary Bielfeldt, Market Wizard

Advanced trade management is a lucrative skill to master.

To do it well, you need to be very clear in your objectives, as well as in sync with the market.

But you don’t need to get it perfect.

If you can do half as well as this example that we have used throughout this lesson, you will be in for some very healthy pay days.

Think about how you want to manage your trades, write it down in your trading plan and make sure you follow it. Managing the large positions you will be able to build is going to take discipline so having written rules is essential.

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Until next week.

Sam

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