Not too long ago, most newcomers to the Forex market wanted to be day traders. They had visions of making a whole week’s income on any given night.
With its 24-hour nature, volatility and low costs, the Forex market would seem the perfect vehicle for this kind of rapid transformation.
But the new breed of trader is perhaps a little smarter. They see through the promos from the brokers, promising fast profits. They can see where the true potential lies – in going for the big trends.
Hey, you might not be making your week’s income in an hour, but you could be making your year’s income in a year. Still not too shabby.
In the first post in this series, I talked about some risk management, set-ups and entries:
In this post, we will complete the puzzle.
How to build a large position while keeping your risk small
One of the cardinal amateur mistakes when trading big moves is failing to maximise profits. Instead of a massive win, most “big move traders” end up with a small one.
The solution? A methodology for scaling in near the start of the trend.
By starting slowly and surely, you can build a large position guaranteed to conform to favourable risk/reward ratios.
While there are plenty of methods you can use to scale in, simplest is often best. Once the trend has broken out, wait for a long candle to close near the end of the low (in a downtrend) or near the high (in an uptrend). You want this entry to be 100 pips away from the previous entry.
For those that read this post a little later, you can click the play button to see how the trade worked out.
The question is usually how many times to scale in. You should typically look for around 3 scale in points, while potentially having up to five for a high conviction trade.
If you’re scaling later in the trend, it may be best to treat it like a separate trade and take a bit of profit quickly to try and make the scale-in point risk free. A mistake I have made is scaling in too aggressively, too late, and giving back too much of my gains.
Where to place your stop-loss
Many traders place their stoploss too tight, hoping to improve the risk/reward ratio.
But with a scale-in methodology, you can keep your stop-loss a safe distance from the price, and use market’s money to add to your trade. This keeps the risk of loss on your initial capital small.
One technique I use to avoid being stopped out on trends is to place the stop 25 pips behind the candle from 2 weeks ago.
Then as I add more positions I trail my stop on the entire trade behind the 2 week candle.
This keeps my risk small, but I now have a large position and my stop is still a fair distance away. I won’t be stopped out by any reactionary moves.
You can then continue to trail your stop in the same manner as the trend develops.
To properly understand how to manage your exits, first you need to understand the structure of the trend.
The psychology of the big move
Trends tend to follow a similar structure, based on the psychology of the market participants.
If you can understand this structure, you can effectively manage your trade throughout the trend and keep more of your profits.
For those of you who know about market types, this will seem familiar.
The recent 2000 pip move on the USDCAD is a good example of this trend psychology in action.
- Consolidation. At the beginning of a trend, you tend to get periods of consolidation as the market participants jockey for positioning, taking profits on an earlier move.
- Breakout. Generally after some form of fundamental catalyst, the range will be broken and a breakout will occur.
- Accumulation. There will still be many sceptics at this point, and sellers who are looking for the range to hold. But buyers start to gain control and we see the beginning of a trend emerge.
- Agreement. Once the trend becomes clear, naysayers will close out of their positions at any chance they get and start to position themselves to ride the trend.
- All aboard. Then, possibly on another fundamental catalyst, there will be a fast move as there is no one left to sell and late comers jump on-board.
- Exhaustion. After the rapid move up, players begin to take profit and volatility is predominant as a new range is formed.
- Second chance. Participants that have missed out on the move (and are waiting for a dip) use the pullback as an opportunity to buy, pushing the price back up to the high.
- Major double top. At this point, the nervous new entrants and those that did not sell out at the first opportunity take profit and the trend is confirmed over… at least for now.
With this in mind you can then structure your exits.
How to exit from a big move
Your exits should achieve two things:
- Allow you to capture the meat of the move if it plays out as it should
- Maintain as much of your profit as possible if it does not
Let’s look at how we might achieve this using the above example.
During the accumulation phase, you want to keep the stop wide while you build your position. You don’t want to be unnecessarily stopped out. You might also take some small profit, in case the trend never develops. You can always look to add back on.
In the agreement phase, when the trend is in full flow, you want to give the price room to move, but you can keep this a bit tighter. It can pay to tier your stops: perhaps having one at last fortnight’s low, and one at last week’s low (as long as the weekly candle is not too small).
During the exhaustion phase, the reversal can be rapid. It pays to tighten the stop on all but a small part of your position. You might put it below the low of the 1 week candle or even half of one week.
Once you see the double top, it’s now time to exit any remaining balances. There’s little to gain and lots to lose from here.
If at any point during the trend you see the 3 and 7 period moving averages cross on the weekly chart, then it’s time to apply the emergency brakes and dramatically tighten your 1-week stop.
A few subtle tips to finish
Here are a few tips you can use to improve performance.
- Don’t exit at market. Trail your stop close to the current price instead. This will help you to let your profits run.
- Keep your stop 25 pips below the low/high. Instead of moving your stop to the low of the day or week. Put it 25 pips behind, as this will keep you safe from stop hunting activities.
- Trade 1/3 of your position in and out. Exit a part of your position on reversal patterns on daily charts – and add it back on when you get the opportunity. This lets you trade what is in front of you, while keeping a core position to capture the trend.
- Tighten your stops around news events. If there is a highly volatile news event, tighten the stops on part of your position and possibly use options to hedge your risk.
- Double up. If you are part way though a trend, the profits on your original positions are locked in. During a period of consolidation. It can pay to scale in again, treating it like a new position – this will lead to some very big gains.
These subtle enhancements can make a big difference to your ending profits, so don’t neglect them in your planning.
Now over to you. What questions, thoughts or tips do you have for trading big moves?
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter.