Trading quiz #1 - What happened next
Did you enter the trade long?
For those of you that haven’t read the first part of this trading quiz, please look back a couple of posts and do so now.
For the rest of you, read on and see what happened next…
Firstly, thank you to those that were willing to add their comments regarding how they viewed the chart in the original quiz post. I hope this post answers your questions, and that between them readers can see how some basic technical analysis combined with a backtested trading system and effective money management can help you to trade profitably.
Firstly, have a look at the chart below to see what happened after the candle we discussed in the previous post.
Well happily in this instance, the entry candle we discussed prove to be effective. I trust you all realise that this isn’t always going to be the case.
You can see that the candle the day after the entry is one that might have taken us straight out of the trade depending on the type of stop used, however with a technical stop placed just below the previous trough, the trade was successful this time.
Trailing stops can be useful to help lock in some profit, but when added too soon can stop you out of your trade too early.
The above trailing stops are simply suggestions on how I might have raised my stops for this hypothetical trade.
For those wondering why the second trailing stop wasn’t at the bottom of the red candle prior to the trough I used, it is because the candles didn’t break above the previous peak.
When they did make a new peak, I placed my trailing stop just below the latest trough as shown. By waiting for new highs, I was trying to ensure I wasn’t going to be stopped out simply because a retracement may have been in progress.
I didn’t use the low of the red candle after the 3rd trailing stop, because that candle made a higher high than the candle before it. However, due to the length of the run and lack of retracements, you may feel it is a good idea to start using tighter stops if your profit target has been reached and your trading style is short term rather than long term. I believe this comes down to individual choice and risk profile.
The 4th trailing stop would only have been added if your view of the trade had changed. Perhaps the profit target had been reached, but instead of just closing the trade, a tight stop is set instead? This sacrifices a little profit, but allows the run to continue if it is going to. For this example, we’ll assume the stop was set as shown, but it isn’t important, as this is about where YOU would have set your trailing stops.
To get the most out of this exercise, hold a piece of paper up to your screen and block out all of the candles after the entry. Then reveal each candle one by one, making a decision each time on what you are going to do. Try to identify for yourself when you would move your stops or taken profit, and the reason for doing so.
This quiz is all about the exits. As mentioned in other posts, anyone can enter a trade, but it is deciding how and when to exit that trade that will help determine how successful that trader is.
Hopefully you will take the opportunity to determine for yourself how you would have managed this hypothetical trade.
For example, since it is very likely that my initial profit target would have been met shortly after setting my second stop loss, I may have closed half of my trade for profit, and left the remainder of my trade to keep running. Similarly I may have continued to close half of my remaining positions as new profit targets are reached, but this depends on the size of the trade (and what percentage of your profits would go towards the extra brokerage).
Incidentally, for anyone that would still have hypothetically remained in the trade as at the last candle shown, you will be taken out wherever your stop is set (as it continued to fall).
Happy Trading
Brian Dibbins
Elite Insiders Group - Trading Systems
Trade Profitably © 2006 - 2007
