When we open a trade, we get all the results of the preparatory work of analysis. However, this decision opens a new phase of management of the trade itself, a step that requires very strict rules and must allow the trader to maximize the profit by gradually decreasing the risk.
Every decision must follow precise rules to be observed faithfully. First of all, we need to be aware of what strategy we want to follow. In fact, there are many attitudes when we have to monitor the trade: some traders are trend-followers, others are countertrend.
The following chart shows us the same exchange rate (EURJPY), but from two different points of view. The first one favors an open trade in the direction of the primary trend, while the second one is countertrend. This different approach creates many differences in setting the stop loss and / or the take profit.
EURJPY Currency Chart
Another element to remember is the one concerning the stiffness in the decisions. The most important thing is not to be firm in our positions, but rather adjust continuously the stop loss and / or the take profit to the changing of the market. Often, news from macroeconomic data or central bank decisions alter the volatility of the exchange rate and for this reason it is necessary to monitor the daily economic calendar.
In the chart below we can see the importance of adapting the stop loss levels daily in order to prevent the surprise of a negative news that might eliminate our earnings. For example, in the chart below, the Riksbank's decision to cut the Swedish interest rates on December 17th, has brought EurSek back below the entry point very quickly. A non-adjustment of the stop loss to the breakeven point would have resulted in high losses.
EURSEK Currency Chart
The same strategy of money management should be followed clearly, by fixing the levels of output, both in loss or in profit, but also the percentage of capital that we want to keep within the trade despite the achievement of objectives.
Another important element is the stage of further increase in positions mediating upward or downward from the initial entry price.
Let’s now put together all these concepts and try to understand how to manage the trade, talking about how to manage the closure of the trade itself.
The following graph shows a long trade opened on EURSEK at a time when the trend is clearly in favor of the cross. The decision to enter has matured after the formalization of a bullish head and shoulder figure generated by the breaking of the neck line of 8.6600.
At this point we can fix a priori a minimum take profit (the objective of the figure, so 2000 pips from the break point) and a stop loss (the bottom of the right shoulder 8.5590). Obviously, the situation would have been different if we had opened a short trade, a countertrend The stop loss should have been stricter and most of all, the target should have been more restrained.
EURSEK Currency Chart
Let’s follow now the operation. After the break of 8.66, EurSek took the desired bullish direction. In order to avoid losses, it is important to immediately adjust the stop loss to the entry point and maybe this can be done by setting a personalized rule. Adapting the stop to the entry level as soon as possible might be a chance, but in this case we might run into volatile market movements with frequent activation of the stop loss and poor profitability of the trade.
A more balanced approach is the one that provides the adjustment of the stop loss to the entry level when the price has already reached half of the potential profit. In this case, starting from the potential of 2000 pips, it would have been wiser to adjust the entry stop level when EurSek touched at least 8.7600 (8.6600 + 1000 pips).
EURSEK Currency Chart
A trader can obviously be more or less aggressive in defining the stop loss. Let’s see, for example, the recent case of AUDUSD. AUDUSD has reached a top of 1.0586 on December 12th, exactly on the long term bearish down trend line. All we had to wait for was a bearish pattern, duly arrived the next day with a bearish engulfing pattern. On December 13th, the short springs up below the opening of December 12th (1.0525) with the same day's high stop loss (1.0585). That strategy has clearly won and now the trader can afford to adjust the stop to the input level.
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