Trade Management: Locking in windfall profits
|I got another real-world example of manual trade management for you this week.
It’s a day trade in GBP/USD I found myself in a couple of days ago. The GBP has been a really nice market to trade lately providing plenty of swings and volatility.
The plan was to get in at a price level where I expected buyers to come into the market around 1.3070, using a relatively tight stop of 20 pips. I had no clear profit target for the trade but wasn’t expecting more than a decent bounce. I also was aware that the market might run into trouble around 1.3120 so I knew I had to watch closer should it approach that level.
Here’s what happened. I got my fill at 1.3070 and shortly after the pound showed me that I wasn’t completely wrong with my idea. Once prices had moved to 1) (see chart) I moved the stop below the lowest low since I got in to 1.3060 to reduce the risk by 50%.
At 2) I was up quite nicely already and moved my stop just slightly below the entry price at to 1.3068. After that prices consolidated between 1.3080 and 90 for a while. Until at 3) prices started to move and exploded about 40 pips within minutes to the upside. This I hadn’t expected, probably some news hit the market.
Now 40 pips isn’t a totally crazy move but I had expected this to take hours so this has been a windfall profit at that point. What to do now? I’ve been up about 60 pips with an initial risk of 20 pips. That’s more than I had been looking for so I could have simply closed out the trade and take the profit. But as the pound was exploding in a parabolic way without any corrections why not just trail the stop really tight and see how far it goes?
That’s exactly what I did at 4) and so I got stopped out at about 1.3120 with a nice profit of 50 pips.
So one way to deal with windfall profits is to not get greedy and start locking them in more and more tight. The more parabolic the move gets, the more aggressive you might want to move your stop. Especially in the currency markets these moves don’t tend to carry on for too long.
Happy Trading!
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