On the one hand, traders are being told over and over again that entries only account for about 10% of your overall trading success and I completely agree with that statement. On the other hand, traders (me included) make lists and lists of weekly analysis with the most interesting setups for the upcoming week.
How’s that for a contradiction?
Don’t get me wrong, I definitely believe that there’s value in my weekly forex outlooks. But if so much of the focus needs to be on trade management and how we exit a trade, why is this a topic much less talked about? Maybe because it’s much harder to talk about trade and exit management than to call a setup? Or maybe because many traders feel uncertain to give away how they actually manage their trades?
Of course, I get that I can’t make a forecast on the exits of trades that still need to happen. What I can do, however, is discuss how some of my past trades (both winners and losers) have worked out and go through the trade and my trading decisions in detail. This way, many of the common concepts such as “cut your losses and let your winners run” might become a bit more tangible and easier to grasp for everyone.
I’ve decided to call this series on trade management and exit management: The Exit.
EURAUD 1H short
So, let’s start off with a trade I took last week. This trade actually turned out around break-even, but I don’t mind showing those types of trades as I believe that often, there are more lessons to be learned from reviewing trades that didn’t work out as planned.
Let’s first go over the reasons for taking this trade. We could see a nice uptrend with multiple trend waves. Then, a double top happened at a previous resistance level, with the second top being a spike to the upside and then a strong move down. Similar to the pin and drive, this indicates strong rejection of a level.
Given the right circumstances, candlestick patterns like this are often a good entry trigger. The price broke the moving average and closed lower than the previous local swing low. I took an entry.
Initially, the setup came along nicely and went my way for the first three candles. There was little to worry about and the first potential support area I had defined was a bit lower, closer to the 1.49000 level. This coincided with a previous swing high and a reaction zone in the preceding uptrend:
Of course, you could argue that there was already a demand zone at the point where the price turned around, but analysing a trade in hindsight is always easier 🙂
The first time I intervened, was after the third green candle. The bullish candles kept on increasing in size, which isn’t something I had in mind when entering the position. The question I always ask myself once I’m in a position is this:
Is the price doing what I expected it to do?
If not, reduce size or get out of the position. Of course, you should account for regular price swings as this is something that happens all the time, but the closer to the entry that the price is, the faster I will intervene in order to preserve capital. In this case, I felt that the bulls started to become more in control. This motivated my decision to close half of the position after the third bullish candle:
So at this point, I only had half of the position size left. Let’s continue. Price again moved in my way with the bearish candle, which was a good sign. The plan was to add the 50% to the position again once the price managed to break the previous local lows. This hadn’t happened yet, so I just stayed in the trade.
The next candle, however, painted a completely different picture. It was a strong move up and ended up placing the position slightly in the loss. At this point, I didn’t feel as confident about the trade anymore and decided to cut it for a small 0.1R loss.
Because I had already reduced my position size in half previously, this actually wasn’t even a loss since the first time I reduced the position resulted in a small win. Both exits pretty much cancelled each other out.
This is very much my trading style: if something doesn’t work out as I planned it should, I will cut it very fast.
This is what is commonly meant with “cutting losers early“. Yes, it’s a loss, but my account can take many of those small losses since one good winner will offset trades like this by a factor of 20 easily. My number one rule is capital preservation and I believe this is a good example of how to do it.
What’s your trading style? Let me know how you would’ve managed this trade!