Logical Trade Management in Action

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

Trade management is an essential ingredient of any trading strategy. And yet, it’s very difficult to come across decent ideas or explanations of how to properly manage trades. Have you ever exited a successful trade at 1.5 or 2R, only to see the trade continue on it’s merry way after a period of consolidation and become a 5-6 R trade? I have, and it’s not pleasurable.

Vice versa: have you ever entered into a trade, see the market go in your favour but then retrace back to your entry and start to make negative closes against you? These can be confusing events, because from one angle you don’t want to “trade your equity” despite the fact that price is below your entry. But at the same time, how long of a wait is “long enough” before it makes sense to bail on a trade?

Trade management can be quite tricky but with a few logical guidelines anyone can learn logical trade management practices. In particular we shall review a trade that was taken by a few members of our Trading Tribe chatroom that have recently “graduated” from our Forex System Development Workshop.

Enter AUDNZD

“I traded on the first day of the competition, then managed the trades until they finally got closed. I caught a good run and remained seated until my positions were naturally closed out via their trailing stops” – Savy Italian Trader, winner of a Trading Contest

AudNzd is a trade that has been discussed in our Trading Tribe quite often of late. The main reason is that we have witnessed a monetary policy divergence trade emerge recently, with the RBA adopting a hawkish tilt against a dovish lean from the RBNZ. We used this example in a recent blog post to explain how fundamentals can assist with the identification of a clear bias or direction for your trades.

AudNzd Daily Chart – focus is on the month of February

AudNzd is a currency cross that doesn’t tend to trend very often. Usually countries that are geographically close have a currency cross rate that remains rangebound until there is some kind of meaningful deviation in fundamentals – like in our case!

There were two notable entries that our members latched onto, which are worth illustrating.

AudNzd Daily Chart illustrating the 2 different entries

  • The first entry (close to Number 1) was a “fade” entry: it was a counter-trend Doji off of recent evident support levels. Price had been rangebound for a couple of months and hence this kind of entry still made sense. Also, this happened before the policy divergence trade took place.
  • The second entry was a 1-2-3 reversal entry based on the emerging policy divergence between the RBA and the RBNZ. There is nothing special about this entry. After the initial low (1), we made a lower momentum high (2) and then a higher swing low (3) which is signalling a change in market dynamics (see here for more).

Logical Trade Management in a Range

The first “fade” entry was essentially a range play. Trade management in a range requires a more active approach than trade management in a trend. However, by selecting market types from the daily chart, retail traders with part-time or full time jobs still have enough time to react.

AudNzd 1H chart illustrating entry (white), positive days (green) and exit (red)

In the chart above we have the trade management used in the range trade. We are cogniscent of the range barriers and as such, it is logical to exit the full position at the first sign of hesitation. Until the range breaks, we need to believe it will hold.

  • objective is multi-day so evaluate market performace around the close of business each day (17.00 EST)
  • verify that the day is closing strongly in your favour, having printed a higher high, higher low & higher close than the previous day
  • exit when the day shows evident signs of  reversing via either higher high, higher low but lower close (i.e. Doji or Spring Hammer formation), lower high, lower low and lower close (i.e. outside day or engulfing)
  • tighten stop if the day shows evident signs of stalling via a higher low & lower high (i.e. inside day) or when momentum starts to shift aggressively intraday (usually because of a news print)

Logical Trade Management within a Trend

Once the policy divergence became evident, AudNzd looked poised for a sprint higher. With strong fundamentals you can have confidence that the range will break. If it doesn’t, your trade management will get you out of the trade anyhow. Here’s what happened:

AudNzd 1H chart illustrating entry (blue line), positive days (green), neutral days (yellow) and counter-trend days (red)

In the chart above we have the trade management used in the trend trade. We do not have range barriers to be aware of. Instead, we have prior resistances to be aware of. As such, it is logical to scale out of the position at the first sign of hesitation, but not exit the full position until there are signs of reversal.

  • objective is multi-day so evaluate market performace around the close of business each day (17.00 EST)
  • verify that the day is closing strongly in your favour, having printed a higher high, higher low & higher close than the previous day
  • exit when the day shows evident signs of  reversing via either higher high, higher low but lower close (i.e. Doji or Spring Hammer formation), lower high, lower low and lower close (i.e. outside day or engulfing)
  • tighten stop if the day shows evident signs of stalling via a higher low & lower high (i.e. inside day) or when momentum starts to shift aggressively intraday (usually because of a news print)

To be honest, there was one day (Feb 16th) that was a difficult call. The prior day was a neutral day, hence suggesting tightening the stop. The next day closed negative and could have very well been reason to close the trade & wait for another  trigger to get on board.

This is where a tad of discretion can come into play. That retracement did not start from any evident resistance. Hence, it was more likely to be profit-taking and not an actual reversal. The daily candle print was also not quite as evident as the actual exit doji on the 22nd.

Over to You

Having a logical framework for managing your trades is essential. And yet, it’s one of the areas that many traders either ignore or struggle with simply because there aren’t many good resources available in the public domain. Hopefully, readers will find these examples inspiring.

Trade management, like other aspects of trading, doesn’t have to be complex. It should be kept logical, and in line with the objectives for the trade.

Tip of the hat to those Trading Tribe members that managed this trade in such a logical way (you know who you are!).

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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