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Getting Paid to Trade by the Market (Part 4)
10/02/2008 10:07 am EST
Instead of moving our initial stop loss order up to a break even stop order, we now take half the position off at the congest area, locking in 75 ticks on half the position. Now if price backs off, and we stopped out of the second half of the position, we’ll still have been paid for having our capital at risk. And if the market continues to move in our favor, we will still participate in the move with half our original position.
As long as we understand how this affects our risk reward ratio and are willing to accept the risk reward ratio of the entire position, win or lose on the second half of the position, this can be a very powerful money management tool! Let’s see what the market gave us on the second half of this position:
You can see that after we took profits on half our position at the congestion area, price stalled and turned back lower. When we took profits on the first half of our position, we moved our initial stop loss order to break even and price did come back lower to stop us out at break even on the second half of this position.
Because we locked in 75 ticks on half the position, we got paid for having our capital at risk and lost nothing [except for the cost of brokerage] on the second half when price retraced all the way back to our original entry area.
As I said at the beginning of this piece, I have a handful of students in one-on-one mentoring using different variations of this same technique. Some cut their positions into thirds, some always take a portion of their position off at a set number of ticks, and others always run trailing stops under a portion of their original position—all of them work to get to break even stops on their positions as quickly as possible while maintaining a solid risk reward ratio.
I’ve showed you how these traders I mentor make ‘Bread and Butter’ trades to keep putting money in their pockets. I call it ‘making donuts’ and another long-time professional trader friend of mine calls it ‘slicing sausage’. The key is the same: find a way to consistently put money in your pocket and over time, if you are using good risk reward ratios and solid money management, your pockets will fill up!
I wish you good trading.
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