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Trade Management: The Speculator way
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Author Trade Management: The Speculator way
shekharinvest
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Post: #11   PostPosted: Mon Mar 21, 2011 2:52 pm    Post subject: Reply with quote

Just copied from somewhere Mr. Green :


Three rules for position sizing:

1. Bet high enough to make meaningful profits when you win.

2. Bet low enough so that you are OK financially and psychologically when you lose.

3. If (1) and (2) don’t overlap, don’t trade.



SHEKHAR
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shekharinvest
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Post: #12   PostPosted: Mon Mar 21, 2011 1:53 pm    Post subject: Reply with quote

Speculator,

Great efforts are being undertaken by you to help ppl like us to gain knowledge and understanding of the game called Trading.

Very nice writeup on trade management - the concept is so basic yet so much alien to the traders. Only if one could follow them with military discipline one can hope to succeed in trading.

Thanks for writing and giving an opportunity to refresh what has always been fundamental to trading.

SHEKHAR
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raksin
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Post: #13   PostPosted: Fri Mar 18, 2011 8:33 pm    Post subject: Reply with quote

Spec nice post groupwave1 Highly appreciative thanks
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bullseye
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Post: #14   PostPosted: Fri Mar 18, 2011 8:11 pm    Post subject: Reply with quote

Knowledge is power.....thanx for empowering us The SPEC thanks
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rvg
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Post: #15   PostPosted: Fri Mar 18, 2011 6:58 pm    Post subject: Reply with quote

Spec.. Many thanks for the document..
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kanna
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Post: #16   PostPosted: Fri Mar 18, 2011 9:42 am    Post subject: Reply with quote

Spec, Another great post. Appreciating your efforts in educating others. i know how long you took to edit this and post it here. Even after posting you have edited it thrice (So far) whch shows your commitment on this.

Thanks a lot Spec. I think with the swing strategy and this post alone, one can trade in a decent manner.

Thanks again spec.
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enroute
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Post: #17   PostPosted: Fri Mar 18, 2011 12:11 am    Post subject: Reply with quote

thanx sir for sharing this wonderful work.. Smile
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jcravindra
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Post: #18   PostPosted: Fri Mar 18, 2011 12:10 am    Post subject: Link Reply with quote

The link provided in this article fails to open. For benefit of readers like me can this be revived?
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ashis
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Post: #19   PostPosted: Thu Mar 17, 2011 10:49 pm    Post subject: Re: Trade Management: The Speculator way Reply with quote

Dear sir,
Thanks for this good work and hope many people like me can learn from this.

Regards
Ashis

Speculator wrote:
My technical trading methodology has been already been explained in my other thread:


http://www.icharts.in/forum/swing-trading-the-speculator-way-t2230,postorder,desc.htm


I consider that project complete and there is nothing more to add or remove from that methodology.


There have been many private messages to me on how much capital is needed for trading, how to exit, where to exit, partial profit booking, Trailing stop loss etc. So i thought i will complement my trading strategy with this trade management post and call it a completed project. The following trade management concepts can be used with any strategy and not just the swing trading strategy.

Trading strategy alone will not make money. Having a trading strategy is 50% of the game. The rest 50% is trade management. Trade management includes the following:

1) Position sizing
2) Entry
3) Intial Stop Loss
4) Risk/Reward calculation
5) Exit guidelines (Partial exit, Full exit, Trailing stop loss, etc)


1) Position Sizing

Well, the first thing a trader needs to determine is how much capital is required to trade 1 unit of any instrument (stocks/futures/commodity/currency etc).

Let's take the example of Nifty as it's one of the most popular trading instrument. A rule of thumb is that one should not risk more than 2% on one single trade.

Now in order to calculate the risk on each trade, one has to consider what size of SL is required to trade an instrument in a given timeframe. Let's say one is trading Nifty in 15-min timeframe and let's assume it requires a 20 point stop loss. 20 points equals Rs 1000 in risk. If one has a capital of let's 50,000, then 2% risk of 50000 is Rs 1000. So one can trade 1 lot of Nifty with a Rs 50000 capital assuming a max risk of 2% on each trade and a SL of 20 points.

Let's say a trade requires 40 points SL on a trade. Then one would require 1 Lakh capital to trade 1 lot. If one is trading a lower timeframe like 5-min
which requires a 10 point SL, then one could trade 2 lots with Rs 50000 capital, if your broker margin requirements allow it. So the bottomline is the number of lots (or shares) traded for a certain capital is a function of your stop loss size.

If one is a more conservative trader, he/she could use 1% max risk per trade. In this case one would require 1 Lakh capital to trade 1 lot, assuming a SL of 20 points.

2) Entry

Entry is based on strict rules from the system. Entry rules for my system are outlined in my trading strategy thread.

3) Initial Stop loss

Initial Stop loss is again system dependent. For my swing system, the intial SL is always above the pivot. If the pivot is too far, one can use 2 * ATR as the stop loss. (ATR = Average True Range)

So use the pivot or 2*ATR as SL, whichever is smaller.

Again Stop loss is a guideline, not a rule, unlike trade entry. So one may devise his own SL guideline according to his comfort.


4) Risk/Reward

Risk/Reward is an important parameter to calculate as soon as a trade is entered. This is an important parameter that would guide one's exit. Initial stop loss is the risk taken on a trade.

Let's say for example the initial stop loss is 20 points.

1:2 Risk/Reward means for a 20 points risk, the reward should be at least 40 points. That means you should aim for at least 40 points profit on a trade where you risked 20 points as stop loss.

Why is risk/reward important ?

Let's say your system has a 60% winning rate. That means out of 10 trades you have 6 winners and 4 losers. Let's calculate the net profits for various risk/reward scenarios.

Risk/Reward 2:1 (40 point SL, 20 point reward)
6 winners would make a net of 20 * 6 = 120 points
4 losers would lose a net of 40 * 4 = 160 points
Net you lost 40 points.

Although one's winning rate was 60%, the end result was losses


Risk/Reward 1:1 (20 point SL, 20 point reward)

This is a typical risk/reward of most day traders.

6 winners would make 120 points. 4 losers would lose 80. Net 40 points profits after 10 trades.


Risk/Reward 1:2 (20 point SL, 40 point reward)

This is the minimum risk/reward for a typical swing trader.

6 winners would make 240 points and 4 losers lose 80 points. Net 160 points after 10 trades.


Risk/Reward 1:3 (20 point SL, 60 point reward)

6 winners would make 360 points and 4 losers would lose 80 points. Net 280 points after 10 trades.


Now let's say one's winning percentage is only 40% (4 winners, 6 losers). One would still make money with a 1:3 risk/reward.

Risk/Reward 1:3 (20 point SL, 60 point reward)

4 winners would make 240 points and 6 losers would lose 120, with a net 120 point gain after 10 trades. Even with only a 40% winnng rate we still made good money here.


So the bottomline is, it's not the winning rate alone that is important, but the risk/reward in conjunction with the winning rate.


5) Exit guidelines

Again, Exits i don't call as rules, but as general guidelines, because one can design exit rules according to their risk/reward expectations and their comfort.

Here are the guidelines for exit.


Once a trade is entered, the intial stop is set immediately. The intial stop loss should not be modified until at least a risk/reward of 1:1 is achieved.


So let's say the intial stop loss is 30 points.

1:1 R/R (risk/reward) = 30 points
1:2 R/R = 60 points
1:4 R/R = 120 points
1:6 R/R = 180 points


Until 1:1 R/R is acheived i.e until you position is in at least 30 points profits, the intial stop loss should not be modified. The Trailing Stop Loss (TSL)
does not come into picure until 1:1 risk/reward is acheived. Once 1:1 risk/reward is achieved, the goal is to make sure that a winning trade does not end up a losing trade. So one has to start using a trailing stop after 1:1 R/R. I will go into the details of TSL a bit later. Befor that i will explain the easy part, which is taking profits.


Let's say the trade enters into a 1:2 Risk/Reward profitability without the TSL being taken out. Then it's that magic time ! Counting money Very Happy

Booking profits can be partial or full depending on how many lots are traded

If trading only 1 lot, full booking will have to be done at this stage. If one prefers not to book profits, one may wait until the TSL gets hit.
If one is trading 2 lots, half profits should be booked here.
If one is trading 3 lots, 1/3 profits should be bookd here.


Let's say the trade now progresses into 1:4 risk/reward area, wihtout the TSL getting hit.

Those trading 1 lot, too bad, you have nothing to do here.
Those trading 2 lots, the rest half should be booked here. If one prefers not to book profits here, one may wait until the TSL gets hit.
Those trading 3 lots, another 1/3 should be booked here.


Let's say the trade now progresses into 1:6 risk/reward area, wihtout the TSL getting hit.

1 lot and 2 lot traders have nothing to do here.
3 lot traders can book the last 1/3 here. If one prefers not to book profits here, one may wait until the TSL gets hit.

Those trading more than 3 lots can book profits in multiples of 2 or 3 lots.

If one is using a TSL, a trade rarely progresses beyond the 1:4 risk/reward area without the TSL getting hit. When TSL gets hit all positions should be
booked fully. Once out of all positions, we look for the next trade i.e next rejection in my swing system.



How to calculate the TSL ?

There are various methods to calculate TSL - Using parabolic SAR, Using Volume pivots, Using Fibonacci levels, Using MA, Using ATR etc

I personally prefer using ATR with a simple technique that i have devised. Here's how it works...


Let's say we are in a long trade. We wait until we reach at least 1:1 risk/reward profitability. At this point, i wait for the candle close. Lookup the value of the indicator ATR (Average true range) on the last candle. Calculate 1/2 ATR i.e 0.5 * ATR. Lets say the candle low was 5200 and the ATR is 24. 1/2 ATR = 12. Subtract 1/2 ATR from the candle low. That would be 5200-12 = 5188. So 5188 becomes your trailing stop loss. As the market progress higher you calculate the TSL for each candle which obviously keep rising. For shorts use the same technique, but add the 1/2 ATR to the top of the last candle.

If one is carrying positions for next day, then today's ATR calculation will have to be thrown away and a fresh ATR calculation should be started the next day after the first candle closes.

My experience is that 1/2 ATR above candle high or below candle low works well for 15-min and above timeframe. On 5-min, usually a 1 ATR would be needed. Again one needs to experiment a bit to find out the optimal ATR for trailing based on how choppy an instrument is. I generally prefer trading smoothly trending stocks or commodities to avoid my TSL getting taken out easily.

I will post an example over the weekend with a chart to demonstrate the TSL technique.


Last but not the least, just remember that there will be periods when the 1:2 risk/reward does not get achieved if the market goes into a very narrow/compressed trading range. There is nothing to do then, other than keep trading and ride out that rough period. Care should be taken not to go for lower risk/reward during those times as that would develop into a habit which will carry over when the market starts a range expansion. Ensuring that we have a TSL after 1:1 risk/reward will usually ensure that a trade is at least breakeven even during those compressed ranges.

Note: The above explanation is in as simple a language as possible and is self explanatory. So i expect not be bombarded with questions in SB.


- Speculator Very Happy
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Jai2000
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Post: #20   PostPosted: Thu Mar 17, 2011 10:28 pm    Post subject: Thank you ! Reply with quote

Spec sir,

You are a wonderful caregiver! There's no word to say other than "Thanks".God bless you !
Regards,
Jai.
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diwakar
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Joined: 10 Feb 2010
Posts: 54

Post: #21   PostPosted: Thu Mar 17, 2011 10:08 pm    Post subject: Great Work Reply with quote

Spec

Great work...... Very Happy Very Happy Very Happy

Much Interesting than your swing trading strategy.....

Encouraging post....

Thanks for your efforts.....

Regards,
Diwakar R
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tripathi_manu
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Joined: 27 Dec 2008
Posts: 62

Post: #22   PostPosted: Thu Mar 17, 2011 10:08 pm    Post subject: Re: Trade Management: The Speculator way Reply with quote

Speculator wrote:
My technical trading methodology has been already been explained in my other thread:


http://www.icharts.in/forum/swing-trading-the-speculator-way-t2230,postorder,desc.htm


I consider that project complete and there is nothing more to add or remove from that methodology.


There has been many private messages to me on how much capital is needed for trading, how to exit, where to exit, partial profit booking, Trailing stop loss etc. So i thought i will complement my trading strategy with this trade management post and call it a completed project. The following trade management concepts can be used with any strategy and not just the swing trading strategy.

Trading strategy alone will not make money. Having a trading strategy is 50% of the game. The rest 50% is trade management. Trade management includes the following:

1) Position sizing
2) Entry
3) Intial Stop Loss
4) Risk/Reward calculation
5) Exit guidelines (Partial exit, Full exit, Trailing stop loss, etc)


1) Position Sizing

Well, the first thing a trader needs to determine is how much capital is required to trade 1 unit of any instrument (stocks/futures/commodity/currency etc).

Let's take the example of Nifty as it's one of the most popular trading instrument. A rule of thumb is that one should not risk more than 2% on one single trade.

Now in order to calculate the risk on each trade, one has to consider what size of SL is required to trade an instrument in a given timeframe. Let's say one is trading Nifty in 15-min timeframe and let's assume it requires a 20 point stop loss. 20 points equals Rs 1000 in risk. If one has a capital of let's 50,000, then 2% risk of 50000 is Rs 1000. So one can trade 1 lot of Nifty with a Rs 50000 capital assuming a max risk of 2% on each trade and a SL of 20 points.

Let's say a trade requires 40 points SL on a trade. Then one would require 1 Lakh capital to trade 1 lot. If one is trading a lower timeframe like 5-min
which requires a 10 point SL, then one could trade 2 lots with Rs 50000 capital, if your broker margin requirements allow it. So the bottomline is the number of lots (or shares) traded for a certain capital is a function of your stop loss size.

If one is a more conservative trader, he/she could use 1% max risk per trade. In this case one would require 1 Lakh capital to trade 1 lot, assuming a SL of 20 points.

2) Entry

Entry is based on strict rules from the system. Entry rules for my system are outlined in my trading strategy thread.

3) Initial Stop loss

Initial Stop loss is again system dependent. For my swing system, the intial SL is always above the pivot. If the pivot is too far, one can use 2 * ATR as the stop loss. (ATR = Average True Range)

So use the pivot or 2*ATR as SL, whichever is smaller.

Again Stop loss is a guideline, not a rule, unlike trade entry. So one may devise his own SL guideline according to his comfort.


4) Risk/Reward

Risk/Reward is an important parameter to calculate as soon as a trade is entered. This is an important parameter that would guide one's exit. Initial stop loss is the risk taken on a trade.

Let's say for example the initial stop loss is 20 points.

1:2 Risk/Reward means for a 20 points risk, the reward should be at least 40 points. That means you should aim for at least 40 points profit on a trade where you risked 20 points as stop loss.

Why is risk/reward important ?

Let's say your system has a 60% winning rate. That means out of 10 trades you have 6 winners and 4 losers. Let's calculate the net profits for various risk/reward scenarios.

Risk/Reward 2:1 (40 point SL, 20 point reward)
6 winners would make a net of 20 * 6 = 120 points
4 losers would lose a net of 40 * 4 = 160 points
Net you lost 40 points.

Although one's winning rate was 60%, the end result was losses


Risk/Reward 1:1 (20 point SL, 20 point reward)

This is a typical risk/reward of most day traders.

6 winners would make 120 points. 4 losers would lose 80. Net 40 points profits after 10 trades.


Risk/Reward 1:2 (20 point SL, 40 point reward)

This is the minimum risk/reward for a typical swing trader.

6 winners would make 240 points and 4 losers lose 80 points. Net 160 points after 10 trades.


Risk/Reward 1:3 (20 point SL, 60 point reward)

6 winners would make 360 points and 4 losers would lose 80 points. Net 280 points after 10 trades.


Now let's say one's winning percentage is only 40% (4 winners, 6 losers). One would still make money with a 1:3 risk/reward.

Risk/Reward 1:3 (20 point SL, 60 point reward)

4 winners would make 240 points and 6 losers would lose 120, with a net 120 point gain after 10 trades. Even with only a 40% winnng rate we still made good money here.


So the bottomline is, it's not the winning rate alone that is important, but the risk/reward in conjunction with the winning rate.


5) Exit guidelines

Again, Exits i don't call as rules, but as general guidelines, because one can design exit rules according to their risk/reward expectations and their comfort.

Here are the guidelines for exit.


Once a trade is entered, the intial stop is set immediately. The intial stop loss should not be modified until at least a risk/reward of 1:1 is achieved.


So let's say the intial stop loss is 30 points.

1:1 R/R (risk/reward) = 30 points
1:2 R/R = 60 points
1:4 R/R = 120 points
1:6 R/R = 180 points


Until 1:1 R/R is acheived i.e until you position is in at least 30 points profits, the intial stop loss should not be modified. The Trailing Stop Loss (TSL)
does not come into picure until 1:1 risk/reward is acheived. Once 1:1 risk/reward is achieved, the goal is to make sure that a winning trade does not end up a losing trade. So one has to start using a trailing stop after 1:1 R/R. I will go into the details of TSL a bit later. Befor that i will explain the easy part, which is taking profits.


Let's say the trade enters into a 1:2 Risk/Reward profitability without the TSL being taken out. Then it's that magic time ! Counting money Very Happy

Booking profits can be partial or full depending on how many lots are traded

If trading only 1 lot, full booking will have to be done at this stage. If one prefers not to book profits, one may wait until the TSL gets hit.
If one is trading 2 lots, half profits should be booked here.
If one is trading 3 lots, 1/3 profits should be bookd here.


Let's say the trade now progresses into 1:4 risk/reward area, wihtout the TSL getting hit.

Those trading 1 lot, too bad, you have nothing to do here.
Those trading 2 lots, the rest half should be booked here. If one prefers not to book profits here, one may wait until the TSL gets hit.
Those trading 3 lots, another 1/3 should be booked here.


Let's say the trade now progresses into 1:6 risk/reward area, wihtout the TSL getting hit.

1 lot and 2 lot traders have nothing to do here.
3 lot traders can book the last 1/3 here. If one prefers not to book profits here, one may wait until the TSL gets hit.

Those trading more than 3 lots can book profits in multiples of 2 or 3 lots.

If one is using a TSL, a trade rarely progresses beyond the 1:4 risk/reward area without the TSL getting hit. When TSL gets hit all positions should be
booked fully. Once out of all positions, we look for the next trade i.e next rejection in my swing system.



How to calculate the TSL ?

There are various methods to calculate TSL - Using parabolic SAR, Using Volume pivots, Using Fibonacci levels, Using MA, Using ATR etc

I personally prefer using ATR with a simple technique that i have devised. Here's how it works...


Let's say we are in a long trade. We wait until we reach at least 1:1 risk/reward profitability. At this point, i wait for the candle close. Lookup the value of the indicator ATR (Average true range) on the last candle. Calculate 1/2 ATR i.e 0.5 * ATR. Lets say the candle low was 5200 and the ATR is 24. 1/2 ATR = 12. Subtract 1/2 ATR from the candle low. That would be 5200-12 = 5188. So 5188 becomes your trailing stop loss. As the market progress higher you calculate the TSL for each candle which obviously keep rising. For shorts use the same technique, but add the 1/2 ATR to the top of the last candle.

If one is carrying positions for next day, then today's ATR calculation will have to be thrown away and a fresh ATR calculation should be started the next day after the first candle closes.

My experience is that 1/2 ATR above candle high or below candle low works well for 15-min and above timeframe. On 5-min, usually a 1 ATR would be needed. Again one needs to experiment a bit to find out the optimal ATR for trailing based on how choppy an instrument is. I generally prefer trading smoothly trending stocks or commodities to avoid my TSL getting taken out easily.

I will post an example over the weekend with a chart to demonstrate the TSL technique.


Last but not the least, just remember that there will be periods when the 1:2 risk/reward does not get achieved if the market goes into a very narrow/compressed trading range. There is nothing to do then, other than keep trading and ride out that rough period. Care should be taken not to go for lower risk/reward during those times as that would develop into a habit which will carry over when the market starts a range expansion. Ensuring that we have a TSL after 1:1 risk/reward will usually ensure that a trade is at least breakeven even during those compressed ranges.

Note: The above explanation is in as simple a language as possible and is self explanatory. So i expect not be bombarded with questions in SB.



- Speculator Very Happy


tks spec
mantri AEOM AEOM


Last edited by tripathi_manu on Thu Mar 17, 2011 10:10 pm; edited 2 times in total
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Speculator
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Post: #23   PostPosted: Thu Mar 17, 2011 9:41 pm    Post subject: Trade Management: The Speculator way Reply with quote

My technical trading methodology has been already been explained in my other thread:


http://www.icharts.in/forum/swing-trading-the-speculator-way-t2230.html


I consider that project complete and there is nothing more to add or remove from that methodology.


There have been many private messages to me on how much capital is needed for trading, how to exit, where to exit, partial profit booking, Trailing stop loss etc. So i thought i will complement my trading strategy with this trade management post and call it a completed project. The following trade management concepts can be used with any strategy and not just the swing trading strategy.

Trading strategy alone will not make money. Having a trading strategy is 50% of the game. The rest 50% is trade management. Trade management includes the following:

1) Position sizing
2) Entry
3) Intial Stop Loss
4) Risk/Reward calculation
5) Exit guidelines (Partial exit, Full exit, Trailing stop loss, etc)


1) Position Sizing

Well, the first thing a trader needs to determine is how much capital is required to trade 1 unit of any instrument (stocks/futures/commodity/currency etc).

Let's take the example of Nifty as it's one of the most popular trading instrument. A rule of thumb is that one should not risk more than 2% on one single trade.

Now in order to calculate the risk on each trade, one has to consider what size of SL is required to trade an instrument in a given timeframe. Let's say one is trading Nifty in 15-min timeframe and let's assume it requires a 20 point stop loss. 20 points equals Rs 1000 in risk. If one has a capital of let's 50,000, then 2% risk of 50000 is Rs 1000. So one can trade 1 lot of Nifty with a Rs 50000 capital assuming a max risk of 2% on each trade and a SL of 20 points.

Let's say a trade requires 40 points SL on a trade. Then one would require 1 Lakh capital to trade 1 lot. If one is trading a lower timeframe like 5-min
which requires a 10 point SL, then one could trade 2 lots with Rs 50000 capital, if your broker margin requirements allow it. So the bottomline is the number of lots (or shares) traded for a certain capital is a function of your stop loss size.

If one is a more conservative trader, he/she could use 1% max risk per trade. In this case one would require 1 Lakh capital to trade 1 lot, assuming a SL of 20 points.

2) Entry

Entry is based on strict rules from the system. Entry rules for my system are outlined in my trading strategy thread.

3) Initial Stop loss

Initial Stop loss is again system dependent. For my swing system, the intial SL is always above the pivot. If the pivot is too far, one can use 2 * ATR as the stop loss. (ATR = Average True Range)

So use the pivot or 2*ATR as SL, whichever is smaller.

Again Stop loss is a guideline, not a rule, unlike trade entry. So one may devise his own SL guideline according to his comfort.


4) Risk/Reward

Risk/Reward is an important parameter to calculate as soon as a trade is entered. This is an important parameter that would guide one's exit. Initial stop loss is the risk taken on a trade.

Let's say for example the initial stop loss is 20 points.

1:2 Risk/Reward means for a 20 points risk, the reward should be at least 40 points. That means you should aim for at least 40 points profit on a trade where you risked 20 points as stop loss.

Why is risk/reward important ?

Let's say your system has a 60% winning rate. That means out of 10 trades you have 6 winners and 4 losers. Let's calculate the net profits for various risk/reward scenarios.

Risk/Reward 2:1 (40 point SL, 20 point reward)
6 winners would make a net of 20 * 6 = 120 points
4 losers would lose a net of 40 * 4 = 160 points
Net you lost 40 points.

Although one's winning rate was 60%, the end result was losses


Risk/Reward 1:1 (20 point SL, 20 point reward)

This is a typical risk/reward of most day traders.

6 winners would make 120 points. 4 losers would lose 80. Net 40 points profits after 10 trades.


Risk/Reward 1:2 (20 point SL, 40 point reward)

This is the minimum risk/reward for a typical swing trader.

6 winners would make 240 points and 4 losers lose 80 points. Net 160 points after 10 trades.


Risk/Reward 1:3 (20 point SL, 60 point reward)

6 winners would make 360 points and 4 losers would lose 80 points. Net 280 points after 10 trades.


Now let's say one's winning percentage is only 40% (4 winners, 6 losers). One would still make money with a 1:3 risk/reward.

Risk/Reward 1:3 (20 point SL, 60 point reward)

4 winners would make 240 points and 6 losers would lose 120, with a net 120 point gain after 10 trades. Even with only a 40% winnng rate we still made good money here.


So the bottomline is, it's not the winning rate alone that is important, but the risk/reward in conjunction with the winning rate.


5) Exit guidelines

Again, Exits i don't call as rules, but as general guidelines, because one can design exit rules according to their risk/reward expectations and their comfort.

Here are the guidelines for exit.


Once a trade is entered, the intial stop is set immediately. The intial stop loss should not be modified until at least a risk/reward of 1:1 is achieved.


So let's say the intial stop loss is 30 points.

1:1 R/R (risk/reward) = 30 points
1:2 R/R = 60 points
1:4 R/R = 120 points
1:6 R/R = 180 points


Until 1:1 R/R is acheived i.e until you position is in at least 30 points profits, the intial stop loss should not be modified. The Trailing Stop Loss (TSL)
does not come into picure until 1:1 risk/reward is acheived. Once 1:1 risk/reward is achieved, the goal is to make sure that a winning trade does not end up a losing trade. So one has to start using a trailing stop after 1:1 R/R. I will go into the details of TSL a bit later. Befor that i will explain the easy part, which is taking profits.


Let's say the trade enters into a 1:2 Risk/Reward profitability without the TSL being taken out. Then it's that magic time ! Counting money Very Happy

Booking profits can be partial or full depending on how many lots are traded

If trading only 1 lot, full booking will have to be done at this stage. If one prefers not to book profits, one may wait until the TSL gets hit.
If one is trading 2 lots, half profits should be booked here.
If one is trading 3 lots, 1/3 profits should be bookd here.


Let's say the trade now progresses into 1:4 risk/reward area, wihtout the TSL getting hit.

Those trading 1 lot, too bad, you have nothing to do here.
Those trading 2 lots, the rest half should be booked here. If one prefers not to book profits here, one may wait until the TSL gets hit.
Those trading 3 lots, another 1/3 should be booked here.


Let's say the trade now progresses into 1:6 risk/reward area, wihtout the TSL getting hit.

1 lot and 2 lot traders have nothing to do here.
3 lot traders can book the last 1/3 here. If one prefers not to book profits here, one may wait until the TSL gets hit.

Those trading more than 3 lots can book profits in multiples of 2 or 3 lots.

If one is using a TSL, a trade rarely progresses beyond the 1:4 risk/reward area without the TSL getting hit. When TSL gets hit all positions should be
booked fully. Once out of all positions, we look for the next trade i.e next rejection in my swing system.



How to calculate the TSL ?

There are various methods to calculate TSL - Using parabolic SAR, Using Volume pivots, Using Fibonacci levels, Using MA, Using ATR etc

I personally prefer using ATR with a simple technique that i have devised. Here's how it works...


Let's say we are in a long trade. We wait until we reach at least 1:1 risk/reward profitability. At this point, i wait for the candle close. Lookup the value of the indicator ATR (Average true range) on the last candle. Calculate 1/2 ATR i.e 0.5 * ATR. Lets say the candle low was 5200 and the ATR is 24. 1/2 ATR = 12. Subtract 1/2 ATR from the candle low. That would be 5200-12 = 5188. So 5188 becomes your trailing stop loss. As the market progress higher you calculate the TSL for each candle which obviously keep rising. For shorts use the same technique, but add the 1/2 ATR to the top of the last candle.

If one is carrying positions for next day, then today's TSL calculation will have to be thrown away and a fresh TSL calculation should be started the next day after the first candle closes.

My experience is that 1/2 ATR above candle high or below candle low works well for 15-min and above timeframe. On 5-min, usually a 1 ATR would be needed. Again one needs to experiment a bit to find out the optimal ATR for trailing based on how choppy an instrument is. I generally prefer trading smoothly trending stocks or commodities to avoid my TSL getting taken out easily.

I will post an example over the weekend with a chart to demonstrate the TSL technique.


Last but not the least, just remember that there will be periods when the 1:2 risk/reward does not get achieved if the market goes into a very narrow/compressed trading range. There is nothing to do then, other than keep trading and ride out that rough period. Care should be taken not to go for lower risk/reward during those times as that would develop into a habit which will carry over when the market starts a range expansion. Ensuring that we have a TSL after 1:1 risk/reward will usually ensure that a trade is at least breakeven even during those compressed ranges.

Note: The above explanation is in as simple a language as possible and is self explanatory. So i expect not be bombarded with questions in SB.


- Speculator Very Happy


Last edited by Speculator on Fri Mar 18, 2011 6:50 am; edited 3 times in total
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