weekly trading lesson

Weekly Trading Lesson: Getting stopped out? Give yourself another chance???

Friday, 27 October 2006 18:54:07 GMT  |  Adam Rosen, FX PowerCourse Instructor

 

The FX-market has a very distinct personality that separates it from all other markets; namely a tendency to create and remain in trading ranges. It is not uncommon to see a common stock traded on the NYSE double in price, or drop by ½ of it value in a relatively short amount of time. On the other hand, the EURUSD may remain inside a 5-cent range for many months at a time. This is due to the fact that as one currency gains value, that finite amount of capital must that drives that currency higher, must inherently come out of another currency, and therefore there is a constant source or pressure that keeps currencies close to their trading mean. With that in mind, traders often times will adopt a simple ‘buy low, sell high” range bound approach. As we strive to pick the next major top or bottom, we may encounter a fairly frustrating event as our trade is stopped out, as the market continues to slightly new highs or lows. It is crucial that we always maintain protective stops at all times, so the question remains; how can we avoid being stopped out right near the high or low? One method is as follows…
Let’s assume we believe the market is overbought, trading above its upper Bollinger Bands, and we place a trade to sell short the market with protective stops placed above the highs, and above the upper Bollinger Band; such as 50-pips above our entry order. At that moment we may also place an entry order at the exact price of our stop order to sell short an equal amount with its own respective stop order set 50-pips above. So for example if we believe the GBPUSD is near it’s highs (near 1.8900), we may choose to sell-short @ 1.8930 with stops placed @ 1.8980. Our next step is to place an entry order to sell-short @ 1.8980, with its own respective stops set @ 1.9030. In addition, we may even give this trade one more chance, by selling short again @ 1.9030, and stops placed @ 1.9080. By doing so, if our analysis has been done correctly and the market does in fact turn back to the downside, we may participate in the subsequent move, even if our initial (1 or 2) stops are triggered.

With that said, it is easy to see how these multiple losses can add up quickly. To offset these potentially excessive losses, we should reduce (divide) the position size in each trade by the total amount of times the trade will be placed. In other words, if we would normally place 1-trade with 3-mini lots, we may break this up to sell short only 1-mini lot per attempt (for a total of 3-attempts). It is true that we will naturally make less money by trading only 1-mini lot as opposed to 3. However over time, it is easy to see that a greater amount of profits will be enjoyed by making money on 1-mini lot, as opposed to losing 1-trade with 3-mini lots.
Best of luck in trading, may all your trades be winners!!!

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