This article is going to describe two slightly more advanced trading techniques: how to trail a stop and how to maximize profits by trading multiple lots.
by: Richard Krivo
@RKrivoFX – Twitter
Let’s cover using multiple lots first…
Since as traders we always want to minimize risk as much as possible, I offer the following cautionary note: each time a trader adds an additional lot to a trade, they take on more risk. It may still be only one trade, but the size of the trade obviously plays a part. For example, if a trader opens a single trade with a 100 pip stop, they take on 100 pips of risk. If they open the same trade but with three positions, they are taking on 300 pips of risk! It is imperative to be sure that the size of your account can handle the additional risk.
Here’s a quick way to make that determination…
A trader should never place more than 5% of their trading account at risk at any one time. When trading a 10K lot, one pip, depending on the pair being traded, is worth roughly $1. So a 300 pip stop would equate to a $300 risk. If we divide $300 by .05 we get $6000. That means unless you have a $6000 account you should not be taking on $300 worth of risk. Possibly the trade can still be taken but with some adjustments to the size of the trade or the size of the account. Either the size of the trade can be made smaller or the size of the account can be increased.
Moving on to implementing the strategy…
Since a picture, or a chart in this case, is worth a thousand words, let’s take a look at a historical 1 hour chart of the GBPNZD to see how we can employ our trailing stops and multiple lots strategy.
Here’s how we will trail the stop…
Since the pair is in a downtrend, we could enter the trade by selling three 10K positions at the point labeled “Short Entry”. Price has broken through support triggering our entry and the stop would be placed at the “Stop 1″ level. As price continues to move in our favor and breaks below the second green support level, we would close one of our three positions and move the stop to the “Stop 2″ level.
By doing this we have locked in roughly 110 pips of profit
We also have placed our stop above a new resistance level so that our two open positions are protected. Moreover, since our stop is now below our entry at this point, if the pair retraced and hit our stop we would show a small profit on the remaining two open positions plus the 110 pips we gained by closing the first position. At this point, we have removed all risk from this trade.
As price continues to move in our favor, making lower highs and lower lows, when it moves below our next green support level we would close out one more position locking in a gain of about 310 pips on that one and move our stop to “Stop 3″. As it was in the case above, we have locked in more profit and, by trailing our stop to the next level of resistance, we are protecting our “floating profit” on the remaining third position which is still open.
On the last open position we will simply continue to trail the stop using the same method as above. When price no longer continues to make lower highs and lower lows, we will be stopped out at some point as the pair retraces.
So as price moves through the next green support level we would advance the stop to “Stop 4″.
We can see that price did not continue to move lower and, as price retraced, we were stopped out at the “Stop 4″ level. Since our third position had been open since the very beginning of our trade, we were stopped out with a gain of 320 pips on the last 10K lot.
Overall, the total gain on the three lots was 740 pips
Had a single lot been placed on the trade the gain would have been 320 pips. Now, don’t get me wrong, 320 pips is nothing to sneeze at. However, given the choice, I’ll opt for 740.
From these examples the potential benefits of manually trailing one’s stop and trading multiple lots is quite apparent.
As always, when trying anything for the first time, be sure to test the concept out in a demo account numerous times until you completely understand the process.
All the best and good trading,
@RKrivoFX – Twitter