How Successful Traders Manage Their Trades (Part 4)

07/09/2009 12:01 am EST


Timothy Morge


Now let me tell you why I feel so strongly that your first look at any market is the cleanest and usually best look: Price went just over $1 lower before turning back higher. Believe I was quite happy to be flat as price began to make its way higher within the trading range. But then I began to check my e-mails: At least half the people attending my live Market Maps session also took the trade and most also took their profits where I had diagrammed confluence and a logical area to lock in all the profits in an identifiable range. But some of the people from the live session and many people that had read my “tweets” took one-half their profit at 935.70 (where I took all my position off) and price was now testing the 939.50 area; these people wanted to know my thoughts about how they should now manage their position!

My reply to each of the e-mails was the same: To me, this was a simple range trade. The use of scaling out of one-half of the initial position once price hit its logical profit target at 935.70 and staying short the other half in case price broke through the downside support never entered my mind; I am willing to bet the “scaling out” idea came into play once price was exhibiting weakness, with wide range bars lower. But these types of decisions to change the original trading plan are usually flawed, because they are made in the heat of the moment, when profits or losses are dominating your analytical skills. That is why I religiously make a plan and trade my plan. I advised them to either take the profit left on the second half of the position now or at least leave the stop profit order in place at 941.70.

Let me show you a different trade, in the same market, framed completely differently:

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While going through the commodities, I chart live in the Market Maps session, the price action really caught my eye: Price was making higher swing highs and higher major swing lows. Price was pulling back 50 percent off its recent highs (but was still well within its controlling swing) and was approaching the outer parallel and a series of prior major lows from several weeks ago.

As I marked up the chart live in the pre-market session, one of the attendees reminded me that the non-farm payroll numbers would be coming out in about an hour (and this was two days before a major US holiday, so the market may be a bit thin). Now I had a decision to make: Did I want to even consider having a position into such a volatile economic release?

To me, the answer would be decided by how I framed this potential trade. My eyes were drawn to the current price area as a potential area to attempt a long position. But what did the risk reward profile look like and what type of trade would I be looking for? A range trade? A shorter-term swing trade? A longer-term swing trade? A portfolio trade?

Looking at the chart, both in my mind and thinking out loud to those attending the live session, I began to frame the trade: Price is making higher highs and higher lows. It was selling off, but to get to an area where I would want to get long, it had to sell off. The current sell off had done no damage to the current market structure, and if price held, the area of confluence formed by the 50 percent pullback and the outer parallel, this may be a good area to fish for a shorter-term or longer-term long swing trade position.

The initial downside risk, in my mind, would be $2.4 per contract, below the prior minor swing low to the left of price, where there may be some limit entry buy orders that could act as protection for my stop loss order. With a major economic release coming out in an hour, the upside potential could be a test of the first prior swing high at 947 and even the area of confluence formed by the major prior swing high and the up sloping median line, at 949.

  • I would be buying a test of the outer parallel and the 50 percent pullback at 931.3.
  • My initial stop loss order would be below the prior minor swing low to the left, at 928.9.
  • My profit order would be at the confluence formed by the major swing high and the median line, at 949.
  • Note that I intended to do all I could to lower my risk profile before the non-farm payroll release, and if price moved higher, I would try to box in profits with stop profit orders, though some of my ability to watch price and maneuver would be hindered because I was hosting my live pre-market session with several hundred people watching live.

I entered my orders and “tweeted” them out to the world and went back to charting the other commodities on my list that morning (crude oil futures, lean hog futures, natural gas futures, and soy bean futures).

Then I went back live to check the gold futures markets:

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Price came down and traded a bit below the area of confluence, filling my limit buy entry order at 931.30. Price was closing well above its lows and I had a small profit in the position already, so all in all, the market was performing as I had planned it out in my Market Map.

Remember that in the back of mind, I had a clock ticking: the release of the non-farm payroll report. I wanted to reduce my risk profile as much as possible if I saw the opportunity.

Click to Enlarge

I charted the bond futures and then came back to the gold futures chart. At this point, I had nearly $3 per contract of potential profit, so I moved my initial stop loss order from 928.90 up to 930.30, which left me $1 risk per contract. I didn't want to get too close to the price action, but I did want to reduce my risk profile.

More tomorrow in Part 5. Read Part 1 | Read Part 2 | Read Part 3 | Read Part 5

Timothy Morge

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