WaveRider
Master Sergeant
- Messages
- 350
I use the terms "lot" and "position" interchangeably here but they aren't the same thing. No need to use a full lot if your account is too small.
I couldn't find this thread so I decided to research it and write about it. It's actually not that complicated. This is the next step for my trading so this was a good project for me. Some of the higher ups here use this and I'd love to get feedback from them. There are many multiple-position strategies which include pyramiding lots in and out with 10 pip TP intervals or building up several lots as the trend continues and closing them quickly if the trend starts to fade. They are probably worth investigating. I like the one described below. Simple, easy, logical, mathematically sound. Definitely my style of trading. From what I can tell this is typical of how bankers trade.
Let's make it simple. Let's look at one lot vs. two lots.
One lot with a 1:1 risk/reward, say 100 pips either way. You'll need to win better than 50% of the time to make this profitable. This is a very common order placement.
OR
Two lots, one with a 1:1 risk/reward as above and another with a 1:3 risk reward. Say 100 pip stop loss and 300 pip take profit. The math of this means you'll need to win about 35% of the time to make this profitable if both targets are hit, which they might but won't always. Still does help the math. One back test I read about said it gave the trader about a 20% advantage. Pretty nice.
Another way to do this is have a hard SL and TP level on the first order but have a trailing stop and no take profit on the second. This automatically moves the SL to the break even and you can close it manually at the next major S/R level or just let it go until it stops itself. Tight trailing stops aren't necessary or profitable. You have to let a good trend breath and bounce. One simple gauge about whether a trend is turning is by using a 25 period SMA displaced or shifted 5 periods. The 25x5 on the 4h or daily will usually contain a trend. If the price closes on the opposite side of the 25x5, either let the trade stop itself out or take profit there. This is sort of the opposite of picking tops and bottoms. You don't know or care where the top or bottom is, you simply intend to ride the trend until it's exhausted.
This means when you place the trade, you have a valid reason for believing the trade will possibly go 300 pips or at least will likely continue past your 100 pip mark. If the market is really trending, not just retracing, this is no problem. Don't buy or sell directly into a major S/R region. That’s only slightly better than picking tops and bottoms, but is still silly.
Of course, a solid round pip number with a pretty 1:3 ratio is not what you'll use to decide where to put the SL and TP. Your order won't say BUY at 1.5000, TP at 1.5100 and SL at 1.4900 but will be based on S/R, weekly pivots, recent market action.
One advantage of this method is after the 100 pip target is hit and you move your stops to the breakeven point, it's all free money. The first order has paid for the second order. This psychological relief can make for a more profitable trading experience.
What about the double loss? It happens. No one will be mad at you for having a small position to ease the fear of a double loss. It means your position size per position is at most half of what it would have been if it were just one position. Now your potential loss is no more than it would have been otherwise but your potential profit just grew. To help avoid the position moving against you, don’t try to pick the top of a trend or bottom of a trend hoping it will turn around. Any trade is better off being in the stream of an established trend. Let the trend start, wait for a retracement, then get in with your stop hidden behind a major S/R zone (beware of the stop hunters!). Using one lot to pay for a breakeven trade and letting the other take profits with no fear of loss is a very simple way to make the account grow.
I couldn't find this thread so I decided to research it and write about it. It's actually not that complicated. This is the next step for my trading so this was a good project for me. Some of the higher ups here use this and I'd love to get feedback from them. There are many multiple-position strategies which include pyramiding lots in and out with 10 pip TP intervals or building up several lots as the trend continues and closing them quickly if the trend starts to fade. They are probably worth investigating. I like the one described below. Simple, easy, logical, mathematically sound. Definitely my style of trading. From what I can tell this is typical of how bankers trade.
Let's make it simple. Let's look at one lot vs. two lots.
One lot with a 1:1 risk/reward, say 100 pips either way. You'll need to win better than 50% of the time to make this profitable. This is a very common order placement.
OR
Two lots, one with a 1:1 risk/reward as above and another with a 1:3 risk reward. Say 100 pip stop loss and 300 pip take profit. The math of this means you'll need to win about 35% of the time to make this profitable if both targets are hit, which they might but won't always. Still does help the math. One back test I read about said it gave the trader about a 20% advantage. Pretty nice.
Another way to do this is have a hard SL and TP level on the first order but have a trailing stop and no take profit on the second. This automatically moves the SL to the break even and you can close it manually at the next major S/R level or just let it go until it stops itself. Tight trailing stops aren't necessary or profitable. You have to let a good trend breath and bounce. One simple gauge about whether a trend is turning is by using a 25 period SMA displaced or shifted 5 periods. The 25x5 on the 4h or daily will usually contain a trend. If the price closes on the opposite side of the 25x5, either let the trade stop itself out or take profit there. This is sort of the opposite of picking tops and bottoms. You don't know or care where the top or bottom is, you simply intend to ride the trend until it's exhausted.
This means when you place the trade, you have a valid reason for believing the trade will possibly go 300 pips or at least will likely continue past your 100 pip mark. If the market is really trending, not just retracing, this is no problem. Don't buy or sell directly into a major S/R region. That’s only slightly better than picking tops and bottoms, but is still silly.
Of course, a solid round pip number with a pretty 1:3 ratio is not what you'll use to decide where to put the SL and TP. Your order won't say BUY at 1.5000, TP at 1.5100 and SL at 1.4900 but will be based on S/R, weekly pivots, recent market action.
One advantage of this method is after the 100 pip target is hit and you move your stops to the breakeven point, it's all free money. The first order has paid for the second order. This psychological relief can make for a more profitable trading experience.
What about the double loss? It happens. No one will be mad at you for having a small position to ease the fear of a double loss. It means your position size per position is at most half of what it would have been if it were just one position. Now your potential loss is no more than it would have been otherwise but your potential profit just grew. To help avoid the position moving against you, don’t try to pick the top of a trend or bottom of a trend hoping it will turn around. Any trade is better off being in the stream of an established trend. Let the trend start, wait for a retracement, then get in with your stop hidden behind a major S/R zone (beware of the stop hunters!). Using one lot to pay for a breakeven trade and letting the other take profits with no fear of loss is a very simple way to make the account grow.
