Saw is being sharpened. That said, it’s more tedious than I had expected.
K7 TRADE MANAGEMENT APPROACH
Keep in mind….
It might be difficult to find the perfect answer on how to manage my trades. But it’s quite likely that if I review things objectively and work hard, then I will come up with some adjustments that will improve my trade management. It will be better for me to identify a small number of adjustments that I can implement effectively right away rather than coming up with a large number of adjustments that are too complicated to implement. This exercise is not likely to be easy!! Hang in there!
This analysis will help me answer some of the questions that I have raised in previous weeks. I guess the time in Boston in Oct will be an opportunity to pull many of these things together.
In devising an approach for my K7 trade management, I should opt for things that allow me to me feel good emotionally and psychologically throughout the trading session, so that I can work and trade in a manner that is comfortable for me.
This mainly relates to the preference for higher win rates and lower RR ratios rather than lower win rates coupled with big winners.
In an ideal world, my win rate is going to be around 50% with the average RR ratio in a range between 1.3 and 1.6. And I would execute a minimum of 25 or more trades per week. This would generate EV of around 2.5R per week with a 95% confidence interval of (-4.2, +9.3), and implying a strategy edge of 19%.
The trade management approach should also help me to reduce erosion of emotional capital and concentration – by being simple rather than complicated and to be fairly rigid and thus avoid the need for me to make trade management decisions on a continuous basis.
How can I achieve that?
Pre-requisite #1: K7 contextual framework
The strategy is meant to predict short-term price movement based on technical analysis from (predominantly) the 5M timeframe.
A setup is classified as having ‘worked’ if price moved a reasonable distance to the logical target area OR it moved reasonable distance away from the relevant key price level, before making a significant unfavourable move [reasonable – relative to the volatility in the session up to the point of entry], and does so within a reasonable amount of time.
Pre-requisite #2: K7 entries
- Take only valid setups – Aim for a pass-rate of 90-95%. The last three weeks I achieved 58/63 (92%).
- Reduce the number of instruments on which I am focusing. Most likely to just Cable and DAX for now.
- Always enter the entire position in one go rather than entering in two legs. Have two options for exactly where to enter and whether or not to wait for a retracement.
- Make reasonable position management an trade setup criteria.
- pecific pointers for BO-type trades. Is entry too close to BO level? How is price behaving beforehand?
I thought I share some statistics with you – these are from the last 63 trades I took, all over the past three weeks – it would be great to have some comments from you guys? What things can you read from this data?
Trade Management Refinments (detailed info has been omitted for sensitivity purposes)
- As often as possible identify a logical target level for setups.
- If there is no logical target then pick a distance from entry (e.g. 15, 25, 50 points) taking into account the session conditions
- When price enters the target zone manage the trade very carefully with objectives of protecting profits as well as giving the trade room to move to the upside
- Initial Stop Placement – where to place it, depending on the behavior of the EMA’s. Avoid being over-generous.
- Stop Management – when/how/where to do it.
- Managing trades that go against me – look out for the bearish signs.
- Initial RR ratio – look for 1.35:1 or higher
- Initial Target Placement – depending on whether there is a logical target level or not.
- Suggested passive stop management techniques
- Set & forget
- Set & forget with fixed price movements (e.g. 10 pips, 20 pips) – this simply implies that on the basis of the setup, a rise in price is more probable than a fall in price.
- Set & forget but move stop to entry when price goes into profit by 0.67R. I used this technique in 2010-2011 and it worked out ok.
- Suggested advance techniques
- Consider re-entry into the position after retracements
- Incorporating the ‘passing of time’ into stop management
Action Plan: Exercises to complete to carry on with the Trade Management Development
- Work through one instrument at a time in the order of Cable, DAX, EURJPY and finally FTSE. Following that consider EURUSD and USDJPY.
- Reviewing the executed trades. How would the existing C3B trades have played out under the above rules? Would there be some trades that I would have passed over? How would the trade management have differed? What impact would this have had on the bottom line?
- Determine the ideal manners for managing trades involving the instrument in question.
- Also consider other valid setup that the instrument gave, but which I did not take. This could also be done via forextester or by reviewing the MT4 charts.
- Review Questions
- What is the success rate of valid setups? Is there a significant difference across instruments?
- Are there instances where the trade management has positively or negatively impacted on the outcome of the trade?
- Are there many cases where I left a lot of pips on the table when it would have been reasonable for me to get part of them? By ‘reasonable’ I mean: no sign of momentum running out of steam, no key levels to act as hurdles, minimal retracements. Recent examples include trades 513, 543, 559, 564, 565, 572, 584, 585, 588 and 602.
- On average, do working setups produce winners, ‘half’ setups produce scratches and ‘non-working’ produce losers?
The idea is to get one instrument done, then start trading it. Then add the next instrument, test it, trade it, and so on.