Hello and welcome to another edition of the bulls vs the bears. Last we touched on How To Scale Out of Trades. This week we are going to look into how to expand your winning trading positions. Basically we are going to learn how to add to our winning positions. Someone is probably asking “How Do I add on to my winning position without losing my profits?”
Well here are a few simple rules you need to follow:
- Decide in advance the entry levels for your additional pips
- Calculate your risk with your additional pips in mind.
- Put in a trail stop to put your growing trading position withing your risk confines.
Now I can hear someone still complaining”That’s all well and good. But I’m still confused.” No problem I’ll give you a:
You decide to trade on the trend using the EUR/USD pair. You keep a close watch on this pair hoping for a massive breakthrough. Unfortunately all you see is consolidation. So you say to yourself “Hmmmm.. let’s see whether my trader pals will push this pair a little higher.” With that in mind you put in your entry at 1.2700. Immediately you discover that the consolidation gets stuck in traffic at 1.2650. So you decide “Okay, I’ll put my stop at 1.2600.”
But then a red light really flushes in your head. You’re like How about I take my profits at 1.3000? Because the bulls surge may not go further than that.”
Let’ see the first illustration of what we’re talking about.
Ladies and gentlemen, here is a layout of everything that we explained. Firs you see the entry set at 1.2700. Then it’s followed by the trail stop at 1.2600. Even more importantly the take profit is set at 100 pips which translates to $300- not to mention a risk reward ratio of 1:3. Sounds like a good day at the office right?
So you then say to yourself” I’m feeling on the top of the world about my trade. How about I add to my winning position since the market is moving in my favor.” So you decide to add more figures whenever you hit 100 pips. You thren add a trail stop of 100 pips. Because you are adding additional figures, you decide on 1% as your risk parameter. Since your initial account is $10000 your risk is 1% -or $100 You will add 10000 units every 100 pips and trail your stop every 100 pips.
Now let’s watch 3 graphics showing a change in risk-reward with each addition of pips
The three graphics above do a nice breakdown of how to add to your winning positions without blowing your account to smithereens. Now before you get all excited about adding every winning position in your mind’s eye, let me sound a little warning. Winning positions may not always be suitable for every market situation. The best situation for winning positions is trending markets.
As you add a winning position, the average price moves in your direction as well. Now you’re probably asking yourself ” What does this mean?” Well even if the market pulls back against you, you don’t suffer the humiliation of your trading position going negative. Also be aware that adding winning positions in range bound markets can be hazardous to your trading health. Your trailing stop could end up taking a major hit. In other words you could be completely stopped out. Even more precarious to your trading health you could you use up your entire margin. This could trigger a margin call from your broker. And we don’t want that. Do we?
That’s a wrap for “Expanding Your Winning Trading Positions. ” This brings to an end to our series on scaling in and out of trades. Sorry but all good things must come to an end. I hope you have blast learning how to scale in and out of trades. I know I did. Before we end this series, let’s recap on the rules of scaling and scaling out of trades.
- Always use stop losses. Your trades will burn if you don’t use them
- Only add to losing positions if your trading positions are withing your risk parameters
- When adding to winning positions use a trail stop if your added position carries a huge risk.
- Before adding/removing from your trading position, Get your position size calculations right before you even think about entering a trade. Failure to do that and your trading position is toast.
- Scaling in trades works with trending markets
- Scaling out trades works best in range bound markets
Til next time take care.
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