Trade management

Trade management encompasses everything a trader does after he opens a position until he closes
it. It includes monitoring the trade, taking profits, moving stop loss and even dealing with
emotions. It is very important to not only understand where/how/when to open a trade, but also
what to do when the trade is open. This topic is a bit subjective, so try to develop your own
opinion and adapt it to your trading style. Being consistent is of highest importance!

Why trade management is important?

When we enter a trade two things can happen. Either you close a trade, or the trade closes you.
Obviously, the first option is more attractive, as closing a trade on your own terms is almost
always higher EV (expected value). Trade management is a powerful tool that you can use to
minimize your losses and maximize profits. But before we dive deeper into trade management, I
want to point out that you can “over-manage” your trades as well. You might find that some of
your trades would’ve been a W if you didn’t meddle with SL/TP. Thankfully, keeping a trade
journal can help you pinpoint those errors.

Managing position size

As I covered in my previous article about risk management (you can find it on my twitter feed
if you want to learn more), choosing a sensible position size is critical. This is a decision
that a trader makes even before opening a trade and it should be made very carefully. The size
of your position dictates how attached you are to your trade financially AND emotionally.
Emotions cloud judgement and are one of the biggest challenges in trading. Perfect risk size
should be meaningful enough to grow your trading account when it is correct and sensible enough
to not destroy your account when it turns out to be wrong. Remember, no one trade should make
or break your trading portfolio or emotions.

Break-evens

Trade is called a break even (BE) when a trader chooses to move his SL to his entry point in
order to make the trade “free”. Meaning if the trade is stopped out, you will lose no money. I
feel that traders have very different opinions about this one, but personally, I choose not to
employ this strategy. Let me explain why.

Let’s say you buy an asset at support and expect it to move +10% before taking profits. At some
point it moves in the direction that you anticipated by 1-2% and you decide to move your stop
loss to BE. The asset then retests the support (closing your trade at BE) and then continues
it’s way up again to your target. In this case, you got stopped out on the very same level that
you previously chose to long, leaving you frustrated.

The point that I’m getting at is that both your TP and SL should be based on technical levels
e.g. S/R levels, lows, highs, FVGs, OBs and so on. This is the sole reason I choose not to move
my SL to BE. Let’s take a look at an alternative method to minimize/avoid losses when your
trade starts moving in a favorable direction.
Trailing stop-loss

This trade management concept is based on the very same premise that I introduced previously.
Your stop loss should always be based on technical levels. Meaning that if your trade long
starts moving in the direction that you anticipated and makes a higher low, only then your SL
is moved to the low that was recently formed.

Let’s ignore entry TA for now just to illustrate this example.

Evolving R

Evolving R is a concept that I was introduced to by Trader Dante (not personally of course).
And it basically states that R is dynamic, rather that static. Meaning that it evolves as the
trade develops.

Let’s say that you long an asset at $50 price level. Your target is $100 and your stop-loss is
at $25. Therefore, your initial R=2.
If the price then moves to $90 level and starts to consolidate while your SL is still at $25
dollar level (you are not managing your trade), you are then essentially risking $65 dollars of
downside for $10 upside. So now your R:R ratio looks like this:

It then makes sense to move your SL to a more recent POI (point of interest or a closer market
structure point) to make our R:R more rational. The point of evolving R is not to try to
satisfy your initial R:R ratio, but to help you make your losses as low as possible and your
profits as high as possible. Combine this concept with trailing stop-loss and you have yourself
a decent trade management technique.

Partial profit taking

Let’s say you are in a winning trade. The price is at 50% of your initial TP level and starts
to struggle. Now you may be thinking “should I close the whole position in order not to lose my
potential profits?” or “maybe I should take some % of my position here and let the rest play
out?”. Another popular strategy is taking 50% of your position off the trade and let the rest
run “for free” or move your SL to BE (we covered this one earlier). And while partial profit
taking might seem logical for some traders (for example those who trade large positions and
have difficulty exiting the trade all at once), for most of us, it’s not profitable in the long
term. I am not going to discuss the numbers here, but it basically decreases our trade
expectancy (average trade outcome).

A guy named Dave Mabe ran some back-tests using one of his trading strategies. The goal was to
see what is the outcome of taking partial profits (exiting with 50% of position) once the trade
reached a certain level of profit. Here’s the result:
Red line – no partials, green line – partials.

As you can see, taking partial profits reduced profit expectancy significantly. Even though all
trading strategies are different and partial profits will impact them differently, the bottom
line is - almost every trading strategy that involves partial profit taking will have lower
expected value in the long run.

The only reasonable argument I can think of for partial profit taking is that it offers peace
of mind. You can lay back and relax knowing that you are no longer in risk of losing money (or
risking less), but it also clearly impacts your potential profits. The question then arises,
are you trading for profits, or for peace of mind? How much do you value peace of mind?
Personally, I am here to make as much profits as possible and I would rather rely on a trailing
stop-loss and evolving R principles.

TL; DR

 Trade management encompasses everything a trader does after he opens a position until he
closes it;
 It is a powerful tool to maximize expected value (EV);
 Both your TP and SL should be based on technical levels;
 Combine evolving R and trailing stop-loss principles to manage trades;
 Almost every trading strategy that involves partial profit taking will have lower
expected value in the long run.

Conclusion

To avoid financial and emotional attachment to a trade, use sensible position sizing, enter
only high probability trades, set good SL and TP levels. Once the position is open, good trade
management will help you become even more profitable as a trader. After reading this article
you should form your own ideas on how you might want to manage your trades, journal it and find
any errors that may present themselves. Employing trailing stop-loss and evolving R into your
trade management technique can help you avoid losses while securing more profits. Taking
partial profits might not be a good idea for most traders, but it can offer peace of mind. All
in all, as I mentioned before, trade management is quite subjective and every trader should
develop their own outlook to each of these strategies and adapt them to their trading style.
Good luck!

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