Protecting Uncertain Trades with Partial Closes and Trailing Stops

Not all trades get off to a good start. Some look iffy from the get go.

Maybe the market conditions have changed. Maybe your market assessment was just a bit off. Maybe the market appears indecisive as to its “true” range of value.

In any case, these kinds of conditions tend to place you in a dilemma: you’re not entirely convinced it’s a good trade, but neither are you convinced that it’s bad enough to exit right away.

In other words, you feel uncertain about staying in the trade, but you aren’t ready to close it out.

Is there a way to compromise, a midway point? Sometimes, there is a way to pull this off.

It has more to do with trade management than being right or wrong about your initial speculation.

To use this tactic, however, your trade requires the following:

  1. your position is made up of at least two contracts;
  2. your position is divisible into two equal halves; and
  3. your trade has a predetermined profit target.

If your trade meets these criteria, then read on.

Taking profits early and trailing your stop loss

If your trade is off to an uncertain start, closing half of your position at the midway point and trailing your stop can help achieve one of the following:

  • Outcome Option A: you minimize your losses.
  • Outcome Option B: you close out near a breakeven level.
  • Outcome Option C: you close out at a profit even if your trade ultimately fails.

Note that not all trading environments will give you the range or time to do this. But if you do come across a scenario where you can apply this tactic, it might save your trades from unprofitability or deeper losses.

Let’s take a look at an example in the YM (e-mini Dow Jones futures) contract:

YM (continuous contract) September 12 to December 11, 2018

Let’s suppose you interpreted the decline in the YM as a correction that is about to reverse. You noticed that the swing high at (1) broke above the previous swing high, and the swing low at (2) “technically” looked like a higher low. Instead of interpreting this as a trading range, you erroneously thought it was an uptrend.

You enter a 2-contract long position above the swing low range at (3).

Let’s imagine that at this point you realized you might have made a mistakethat the price action looks more like a consolidated trading range than a trend reversal, and that due to the current geopolitical and fundamental environment–US-China trade dispute, Fed balance sheet shrinkage, partial government shutdown– that the market might have another leg down to go.

You considered closing out your position. But again, what if the market does reverse toward the upside?

Your initial profit target is at the previous swing high a (1) illustrated by the blue line. In case the YM doesn’t hit that price, you’ve decided to take half of your position off at the midpoint (4) between your target and your entry point. Three days later, your midway target has been reached and you unload half of your position.

You immediately begin manually trailing your stop, moving your stop to below the most current bars. When price, fails to reach your initial target and plunges, your position is closed well above your breakeven price.

By managing your position and stops, you were able to seize a small profit from a trade that ultimately was going to fail.

But if you stuck with your initial trade, placing a stop loss below your initial entry bar, you would have ended with a loss.

As with every strategy, this tactic doesn’t always work (nothing consistently works in trading). BUT…it gives you some degree of flexibility to potentially mitigate losses or achieve potential returns in trades that are either uncertain or bound to fail.

The Main Takeaway:

When you enter what appears to be a “high probability” trade but starts looking like a 50/50 win-or-lose scenario, you neither have to sit there and let it ride out nor terminate it completely.

In many cases (not all, but many), you can find a halfway point by managing your trade.

If you’re fortunate, you will reduce your losses. And if you are really fortunate, you may be able to get away with a profit from a losing trade.

 

 

 

Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.

Be advised that there are instances in which stop losses may not trigger. In cases where the market is illiquid–either no buyers or no sellers–or in cases of electronic disruptions, stop losses can fail. And although stop losses can be considered a risk management (loss management) strategy, their function can never be completely guaranteed.

Disclaimer Regarding Hypothetical Performance Results: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.