I trade the pullbacks to price targets unless the price action is telling me to get out early. I am right now working on a money management approach. Depending on how the market is trading, a particular setup may yields a scalp, which is to its first price target, and sometimes a longer move, to its second price target or further. And sometimes the move may only yield 1 or 1.5 points which is usually 1 point shy of making a scalp work with my risk to reward criteria for a trade.
The problem in managing these trades is that there is usually a pullback before the second price target is hit, if it is hit at all. The second price target can normally yield anywhere from about 3 to 5 points for the trade instead of a 2 to 2 1/2 point scalp that I look for as a minimum requirement for a trade. And sometimes, particularly in trending markets, there can be an extended move of up to 8 or more points before a second pullback that is usually deeper than the first pullback experienced. Sometimes I can gauge a move to stay in for the next segment of the move. And sometimes the first pullback is very minor and easily managed with my existing stop loss management technique.
Now I need to develop a money management technique involving the management of the stop loss and the use of multiple contracts to not only to be available for that initial scalp, but also for the extended moves that do occur, most particularly the eight or more points which have been possible in the present market. This is very important for me not to miss out on the extended move. While scalping can pay the bills, it is being on an extended move that makes trading very profitable, and makes all the work put into this job worthwhile. Even though I must say the largest motivation is that I just enjoy following the markets, this type of payoff cannot pay the bills and put money away for more significant expenditures and retirement.
Some issues to consider. Covering the cost of the trade when possible may be worthwhile. This may be independent of managing the trade itself when I can best move up a stop loss to lock an amount for this purpose. Another issue is the locking in of that 1 or 1.5 point profit where price hesitates and can signal an impending pullback may be worthwhile too. Sometimes price can then pullback to either terminate the trade by hitting my initial stop loss, or pull back to lets say 1/2 of my initial stop loss to then make a larger move in my direction. For that matter, that small profit can go to covering the cost of the trade on the other contracts. Yes another concern is the management of multiple contracts where each are taken off separately. This makes executing the trade more complex. So the approach I use here should take this into consideration.
I trade retracements in the form of directional congestions called flags. I also trade 1-2-3 style tops and bottoms including the Trader Vic 2B, and triangle patterns. I find the breakout from triangle patterns much of the time is best faded for the trade, but sometimes price action provides a good entry before the breakout takes place. 2B style tops and bottoms are where there is a spike following an initial pullback which set up the support or resistance for the bottom or top. This spike resolves quickly and allows for much more aggressive entry and money management strategy to procure profits. These trades are on my primary list. The secondary list of trades include spike and ledge patterns, ramps, and others that I sometimes use in special situations.
I use early entrys almost exculsively in my trading. This is where I enter before the breakout of congestion or resolution of the retracement. This allows me to minimize the risk I have to take on a trade to on ocassion 1/2 of a point, and gets me in early enough where even if the trade does not work out where I sometimes can break even on the trade or better. And on some of the larger setups, this can provide me with an adequate profit even though the setup itself did not resolve.
One thing that works for me is that when I choose to exit, much of the time price will not move much further before pulling back. So I usually can tell when price is about to do this. The difficulty lies in determining if this pullback is just going to be small and keep me in the trade before continuing, or is the move over? Here I would like to capture as much profit as I can before finding out the trade is over. And I usually cannot figure this out until price has already pulled back an amount that took a good percentage of my profits away, and on smaller moves taking all the profit away ending me up in a small loss.
I will also say I have found much of the time I can limit losses on a trade to about 1 1/4 points which can different from my initial stop loss placement of 2 points, which is the limit I will take on in terms of risk for a trade.
Any ideas? I will post my current thinking on this subject when I have a chance later today.
Bob Graham
PS: Perhaps the discussion of this topic will help many others in this very important aspect of trading. For through observation I believe that good selection of trades with poor money management can yield a net losing effort. However, mediocre selection of trades with very good money management can produce net profitable results in my trading.
PPS: Gann was correct in stating price is related to time. But as a rule I do not see it conforming to where a straightforward mathematical treatment can be made of price and time, but sometimes it looks to come very close. Knocked my socks off when I discovered this. More in a future post! :-) |
