Trade Management – Trade Exit

Trade Management – Trade Exit

Trade Management is the most important aspect of ZoneTraderPro.  When I was learning to trade and went to a seminar, the guru was always saying “Develop a Trading Plan.”  The only problem was that he never went into how a trading plan was created.  That’s just a minor detail that should have been included in the $3000 seminar fee.  In this series of blog posts, we will look at 3 aspects of trade management and how a trading plan is developed for ZoneTraderPro.   Those three aspects are the trade entry, what you do once you are in a trade, and your trade exit.  Nothing in this post is meant to endorse a trading plan or method, it is only a discussion of the relevant issues when making a trade.  It is incumbent on the trader to test and develop any trading plan with trade management strategies before executing a live trade.

One important aspect of this series is that almost every example used in this series came from 2/07/14. I didn’t have to go and search through months of charts to illustrate a point.  That is because the fundamentals of the pattern trading and filters used by ZoneTraderPro are continually repeating themselves.

The Profitable Trade Exit

The profitable trade exit is probably the most difficult part of a trading plan to accomplish and why proper trade management is important.  In real time the trader is faced with greed.  The trader will look at the target, no longer worrying about getting stopped out, and asking how much further will the market trade past the target that is already established.  Then warning signs that the market will reverse and retrace are ignored, and that 3 point profit is suddenly only a 1 point profit, usually due to poor and no trade management.  It is very common to hear a trader say, “If I could only just make two points every day.”  If this is what you have said in the past, then you need to understand that day trading is a job.

Do Your Job

The job of day trading is hard because you are your own boss.  If you allow yourself to deviate from your established trading plan, then you have not done your job.  If however, you realize that you have six hours to sit and wait for a perfect setup, then you understand your job.  If you set a profit target at 8-9 ticks, and don’t move that target, then you understand your job.  If after your first successful trade of the day, you either go to the beach or again only wait for high probability trades with great setups, then you understand your job.  If you have created a trading plan that includes trade management and done your own statistics, then you really understand your job.

There are three possible trade exit scenarios.  The first trade exit scenario is the fixed profit target.  The fixed profit target says that you want to get a certain number of ticks out of each trade.  If you take this approach then you need to understand that the average winning trade statistics.  Did you go back and create your own statistical database and know what the average winning trend trade was.  Does the TICK divergence trade higher a higher winning average number of ticks?

2/03/14 Trades
2/03/14 Trades

The second consideration is the statistics that are found on the website.  The eSignal version of the software had a counter trend trade pattern programed.  That pattern simply took a trade every time the market traded at the blue counter trend zone.  While this trade was statistically a winner, it did not account for proper risk/reward because the average reward was just the retracement to the intermediate zone, generally just 6-7 ticks.  The two exceptions to this in the Ninja Trader version is the exhaustion and TICK divergence trading patterns.  But it did provide a very important statistic.  That statistic was that 50% of the time there was not adverse excursion in the trade.  This means that half of the time you are in a trade, and price is approaching that blue counter trend zone, the market will take back at least 6 ticks of the profit you just earned.

One justification that could be used to place a lower target would be if the TICK filter has been hit as the market approaches the blue zone.

Trade management and moving a profit target
Trade management and moving a profit target

This trend trade, again from 2/07/14, illustrates the profit target problem.  In it we see a perfect setup for a long trend trade.  It has a perfect TICK setup and the dollar is favorable, and was good for a 2.75 point profit.  Because of the way ZoneTraderPro works, you had 5 minutes to determine where to place the exit.  ZoneTraderPro was painting the blue counter trend zone exactly 5 minutes before the market traded to exactly that price.  Price did not trade through the blue zone, and if you placed the target 1 tick short of the zone, your contract would have been filled.  Then if you evaluated the TICK divergence, that trade was good for another 3 points.  In this instance however the TICK divergence didn’t go to the opposite blue counter trend zone.  So the point of looking at it is to ask yourself the question, is your strategy to take 3 points or do you hold out for the 4-5 points.  The only way you can answer this is by doing the statistics, or instituting a hard profit target as described above.

Trade Management taking profit at the Zone
Trade Management taking profit at the Zone and a TICK Divergence Reversal short trade

The last possible exit scenario was briefly touched upon in the last post.  What do you do if you get into a trade and it gives you 7-8 ticks but your target isn’t hit and filled?  Since the previous post already looked at example from 2/07/14, I am going way back in the archives to 2/06/14 for this example.  This trade has exactly this problem, and one other.  The prices spikes 3 ticks in a single bar (very unusual and a sign of less liquidity) and the TICK filter is hit.  If you had moved the stop to the previous high +1, the stop would not have been hit, and then the market immediately reversed hard. Shortly after that, the dollar goes bearish and the TICK filter is hit to the down side, and the market trades to strong trend support.

 

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