This copy is for your personal, noncommercial use only. Please click here to print the article.
Many traders express anxiety prior to entering into a trade and for good reason. There are many factors to consider when developing a trading plan for order entries. There are thousands of variables including different time fame charts, indicators, trends, and charting patterns to select from. We often get so caught up in this process that we forget that actively managing an existing position can just as difficult and is considered an important part of any professional trading strategy.
Below we have a graph depicting the breakout on the NZDUSD, mentioned in the May 2nd edition of Chart Of The Day. Our entry was set to trade a breakout under .8040. Stops were primarily placed 200 pips away at .8240 and limits were set 400 pips below our entry at .7640. Now that our trade is moving in our favor by over 150 pips, we can select a variety of methods to manage our stop as price heads towards our profit target.
PSAR (Parabolic Stop and Reverse) is an excellent indicator embedded inside of marketscop that can be used to manage stops. The indicator itself was invented by Wells Wilder to assist in finding market trends. Ifprice is below a red SAR dot as pictured below, this is indicative of a downtrend . When price is in an uptrend the SAR dot will appear in green below price.
Traders can use PSAR to manage their positions in the fashion of a trailing stop. During strong trends, price will head in one direction for a long period of time. As pictured below, we can see in a downtrend, price will remain under our red PSAR dot as long as momentum is continuing. To take advantage of this, our stops can be moved forward to the position of the current SAR dot. In the chart below, this point is residing near our opening price at .8040. This will trail our stop forward approximately 200 pips from its primary position. Each day as a new SAR dot is created, we can continue this process of updating our stops and locking in profit as our trend continues.
My preference is to continue to hold our NZDUSD trade as outlined on May 2nd. The stop should be updated in line with the current PSAR reading, thus moving the stop to .8040. Our primary target will remain at .7640 in search of a 400 pip profit target.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .