Trade Management – Once you are in the Trade
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.
What can happen?
There are five possible outcomes here. The first outcome is that you have a winning trade. In a winning trade what you normally see is the market trading to the entry zone, trade briefly there, and trade to the blue counter trend zone for an exit. Here we see a great reversal trade from 2/07/14, which was the third perfect setup reversal trade in an hour.
The second possible outcome is a loss. In another reversal trade later in the day, we see a less than perfect setup and the trade is a loss as it trades to the theoretical stop.
The next three outcomes are why you need a trade management strategy. Trade management is not just about entering and exiting a trade, it is dealing with what the market can throw you once you are in a trade.
The third possible outcome is a trade that initially goes in your favor by at least 4 ticks. In this trade example we see a reversal trade that has the TICK filter being hit as the market trades at the entry. This trade was chosen as an example for two reasons. First it illustrates how powerful the TICK filter really is. If you were in the trade, you were immediately given the opportunity to exit at a profit. This trade then illustrates a trade that goes 4 ticks of favorable excursion. At this point you need to make a decision to move the stop and reduce the risk, somewhere near the previous high.
The fourth possible outcome is a trade that has 4 ticks of adverse excursion but does not trade to the stop. In the first entry on trade management we saw two trend trades with 4-5 ticks of adverse excursion. Once there has been a 4-5 adverse excursion, you only have an 8.6% statistical chance of winning the trade. In each of these trades, the market traded back to breakeven, giving the trader the opportunity to exit without a loss, then turned into a loss. It is also important to remember that that the market does not care where you personally entered the market. When you back test this strategy you will be using the exact trade entry, the beginning of the zone. So if you entered 1-2 ticks short of the zone, where will the exit target be placed?
The last possible outcome is a trade the goes in your favor, but not to the blue counter trend zone, so that your target is not hit. This trade is a divergent exhaustion trade, which is followed by an exhaustion trend trade. If your profit target was not hit on the first move down, do you adjust the profit target to the area of the next blue counter trend zone and adjust the stop to reduce risk?
The first two outcomes require no trader input, the targets and stops are simply hit. But the next three outcomes determine if your trade management strategy will be even more successful or will take unnecessary risks.