Trade Management In Forex Trading
“A bird in the hand is better than two in the bush” - we’ve all heard the saying, but how does this relate to forex trading?
In this article we’re going to discuss the importance of forex trade management and a few different methods of protecting your profits and balance once you’re in a profitable trade.
Forex trade management: break-even stops
Break-even stop losses are the most basic form of trade management. Setting your stop to breakeven won’t protect your profits, but it will prevent a winning trade from turning into a loser. Has that ever happened to you? It’s a horrible feeling seeing a good trade turn bad!
Having said that, moving your stop breakeven prematurely can be just as annoying. If you move your stop to breakeven too early, you can get stopped out of a good trade on simple noise.
Exactly when you should move to breakeven will depend on the strategy, timeframe and market you are trading, but you should generally wait til you have a clear technical reason for doing so.
If you’re moving your stop to breakeven just because you don’t want to lose - you’re probably risking too much per trade!
Forex trade management: taking partials
Taking partials or fading out can be a very effective strategy for managing your profitable trades.
The MetaTrader4 platform allows you to close small parts of a position. Have you ever been on a really good long trade and your gut is telling you to close the position, but the chart still looks really bullish?
This is always a tough decision, sometimes the easiest and smartest option is to just to close half of the position or even a portion thereof.
If your trade is one unit of risk in profit and you close half of the position, the worst that can happen is you break-even. If your trade is two units of risk in profit and you close half, the worst thing that can happen is you make a small profit!
The advantage of doing this over a break even stop, is your stop loss stays in the same spot so you are less likely to get stopped out of the trade in noise.
On the other hand, using a partial close to reduce your risk exposure also means sacrificing some profit potential if the market continues in your favour.
Forex trade management: trailing stops
Trailing stops can be a great way of limiting your risk and protecting your profits without affecting future profit potential. We’re not talking about the standard trailing-stop function in MT4 though, this is almost bound to take you out of the market as 50% corrections are commonplace.
A much more effective method of trailing your stops is manually adjusting your stop as your trade progresses based on technical cues.
The simplest example of this would be simply taking the prior candle’s low or high and setting your stop loss a few pips below or above there at the start of a new bar. There are lots of possibilities though, a sensible method when trading a bull trend would be trailing your stop to the prior swing low, that way if the trend changes and a lower low is set - you are automatically out of the market with a profit.
Some other possibilities include trailing your stop in line with a moving average, or perhaps using a fibonacci tool to lock in 38.2% of your profits (your stop will be triggered when the market retraces more than 61.8%).
The advantage of trailing stops over taking partials is that you are leaving your full size position on the table for future profit potential, but you will still bank a profit if the market turns against you.
The disadvantage of trailing is it is more aggressive version than the breakeven stop ie you are even more likely to be stopped out needlessly on everyday volatility or a healthy correction.
What you do is up to you, just don’t do nothing!
We hope you have enjoyed this quick discussion regarding trade management in forex. There are lots of options and what method works for you will depend on your personality, trading strategy and the market you trade, as well as a horde of other factors.
Like with many other things in forex trading , the important thing is to find a method that works and stick to it. Trade management should be just as prominent in your trading plan as trade entry.
Whether you take a little off the table, move your stop to breakeven, or progressively trail your stop as the market moves in your favour is up to you, just don’t let a winning trade turn into a loss.