Cutting winning trades too early is an issue we hear about often, so here’s how to deal with it
There are many reasons why cutting a trade early is sensible, and many why it’s not. If you don’t like a trade, getting out is the sensible thing to do. There’s never anything wrong with protecting your account. However, the scurge of cutting trades too early, especially when in a winning situation, is something that affects a lot of traders. And, that is purely down to fear. The fear of giving back, or losing gains is a big hurdle to overcome for many. It’s damaging to your account and to your morale. For one thing, it can screw your risk reward, especially if you cut for less pips gain than you set your stops. It damages your morale if the trade then moves further your way and you sit there wondering what could have been. That situation can then force you to jump back in and try to chase back the gains you could have made staying in the trade, or retrying the trade at the same levels without analysing it as a new trade.
How do we overcome the fear and this impediment?
There’s a certain strategy that many of us have been using for the last few years. That’s mainly been driven by the type of markets we’re currently in, which, by and large are ranging with lots of headline noise. We’ve seen long periods of tight ranges with real trends few and far between. That has led us to not holding much confidence in a lot of moves we trade because as soon as you get on something, a headline can turn it right around.
This strategy isn’t something new, it’s not some amazing revelation, it’s just something that fits our current way of trading the markets we’re in. We call it the “Slice & Dice” strategy. It’s a strategy that is very good for short-term and scalp trading but can also feature in longer-term trading. The basic premise is the same as any other trade.
- We want to get our risk lowered as quick as possible after entering a trade.
- We want to maximise the profits when in a trade.
The only way to play this strategy is to trade with sufficient size to be able to cut part of the trade. That will be redundant if you can only trade the minimum size for your account. What we do is enter a trade with the objective of taking some profit after a fairly small move. My approach is to do that with an initial 10-20 pips profit. If I get that, I can immediately move my stop to a break even level on the balance. For example, let’s say I have a 20 pip stop and take profit on half at +10 pips. I can then move my stop to -10 and the risk is now zero. Even if I decide not to move the stop, my risk is still lowered to 10 pips on the whole trade because of the 10 taken on the half. For only a small 10 pip move my way, I can immediately cut my risk by 50% or 100%. I can even lock the stop in at my entry point and thus guarantee the initial profit. Doing that should cut the “fear” factor out of the equation because you’re now better off than when you planned and entered the trade. It potentially gives you a free or lower risk trade to then push to maximise profits. This way, you don’t have to be scared of losing your gains and you can manage the trade as far as you want. If your trade size is big enough, you can continue to cut the trade as it moves further into profit and/or trail your stop up behind.
Through this strategy you can ride a trade If it does move a good distance whilst always protecting yourself from those news or data reversals. The key is removing the fear and that is done by removing or lowering your risk of losing money. Repeat after me, “Lower risk, lower fear”.
Through this strategy our traders in our trading room have managed to sit on the big moves when they happen, or at the least take some profit on the small moves. Of course, there’s a risk you don’t make as much after slicing the first half but the aim of trading is not to lose money, and I’ll take a small profit over a bigger loss every day of the week.
- You need to trade with a big enough size to be able to slice the trade. Depending on your broker and trading circumstances, you can place more than one order, thus giving you control over the stops and TP levels for each part. This is useful to put definitive levels in place rather than doing the slicing on the fly. That can be good if leaving trades overnight or when away from your desk.
- If trading at market, you can also take multiple trades but you are at risk of getting different fills. Otherwise, take one trade and manage it manually. If leaving a trade overnight, perhaps leave an outlier TP target (say 30-50 pips) but be prepared to have your trailer hit also.
- Set a profit target for 10-20 pips for half the trade and if done, move stops up to lower the risk, or leave as your risk is lowered anyway after taking some profit.
- Get your risk down as fast as possible but not at the detriment of the trade. I.e Don’t take half then move your stop 5 pips behind that profit level.
- Set a profit target for the balance and trail a stop, or..
- Manually nurse the trade, slicing more if you see more gains (obviously dependant on the trade size).
- Doing this removes the fear and gives you a greater chance of maximising profits. It takes work and it takes discipline. At all times you should always be comfortable with the initial loss before entering the trade. Apply the normal rules for trading the levels on a chart. Use them as your “slice” points to take some profit if it looks like they’re going to hold.
This is one of many strategies that traders in the ForexFlow trading room employ day to day and something you need to develop and make part of your arsenal. There are many different strategies for different trading situations and if you’d like to know more about this, or any other ways you can improve your trading then that’s the very reason I started the platform. You can see exactly how it’s done live each and every day, and we’re here to share.