In my previous article “the simple guide to risk management” I showed you what you need to achieve just to break even and stay in the game.
In this article I will show you how to skew the reward to risk further in your favor by scaling in and adding to winners and reducing risk at the same time.
To keep this example simple I will use a £10,000 account.
Account Size = £10,000
Risk = 1% (£100)
First Entry Risk = 0.5% (£50)
This is a trade I took on Berendsen on the 27/10/2014. I use a DMA Spread account to keep the trading cost down. The first chart is the daily. On the 16th Berendsen put in a wide range day and finished the day closing positive. A hammer reversal everyone shouts.
Now what I’m waiting for after this burst of activity is the range to narrow or squeeze as they call it. I like to use the 3 day range. (on the intraday chart it is marked in grey). For the three days after the hammer the range was about 55 points. On the 28th the range was 20 points, less than half or about a 64% squeeze. I actually entered my first position on the 27th as I already could see the squeeze was setting up but the break of the high on the 28th was clear as day when it happened as can be seen on the intraday chart.
Where most people struggle with entry’s is they jump in too early and get shaken out or they see it take the high’s out and think I’m too late, I missed it.
My first entry was simply a higher low/high combo and then entered after a close above a 15min candle. If you missed the first pattern it formed into a bigger pattern (orange) and if you missed both of these it took the three day range and the opening 30 min range at the same time. That is the no brainer entry. Simple works best.
27/10/14
First entry @ 936
Stop at 918
Position = 278 Shares
Risk at Stop = 0.5R or £50
29/10/14
Second Entry @ 963 as it traded above the 30min opening range
Stop @ 943 below the opening range locked in £13 from first position
Position = 65 Shares (we reinvested the first positions profit)
Risk @ Stop = £0 (minus any slippage on a gap down)
So I’ve added 65 shares and lowered the risk from 0.5R to break even if it reverses.
30/10/14
Third Entry @ 970 as it traded above the 30min opening range
Stop @ 950 below the opening range locked in £21 from first position.
Position = 105 Shares (we reinvested the first positions profit)
Risk @ Stop = £0 (minus any slippage on a gap down)
So I’ve added another 105 shares and the risk is still 0R (break even) if it reverses.
I now have close to a full position running but I only risked 0.5R on the first position and the second and third position had no risk apart from overnight slippage.
I now have a 2R target on my last position of 1012.4 and a 2R target on my first position of 974.3.
On the 31/10/14 Berendsen gapped higher on the open and blasted through its 30 min opening range high. The first thing I did was raise my stop under the days low at 980 and lock in the first positions 2R target. We now aim to take profit at the last positions 2R target of 1012.4 (this was actually the highest candle on the day)
Here is the math for four different methods of profit taking and trailing.
Stop out at 980 = £135 or 2.7R
Take profit at target =£279 or 5.5R
Take 1/3rd profit at last positions 2R and trail the rest = £243 or 4.86R
Trail under the opening range and get stopped at 1000 = £224 or 4.49R
Here is my spreadsheet to calculate my positions
There you have it, Risk 1 to make 2.7 or more but only have risk on the first position.
The aim is to be right “big” and to be wrong “small”
You will get stopped out of trades at break even after a couple of positions are entered and sometimes the market will take you out at your first entry but that is normal. When the market does move with all your positions entered it becomes a very powerful technique. It’s the exact opposite of averaging down. We’ve all seen how quick people lose money when they average down. Do the opposite. The math doesn’t lie.
Latest Trades
Here’s a couple of my latest trades to give you a couple more examples.
Royal Dutch Shell – Entered 20/11/14 @ 2350. Added on the 21st at 2388 and got stopped out today at 2382.
Also on the 20/11/14 I entered Tullow Oil at 478.5. Added on the 21st at 492. I now have a stop at 495 and if we trade over 510 I will add my last position.
Notes
The best reward to risk is found in tight daily or weekly price action or squeezes.
Narrow ranges can only expand.
Waiting to buy on a retrace will in most cases keep you out of all the strongest moves.
Using Indicators for oversold or overbought on this setup will give the opposite signal and keep you out of the winning direction.
All moving averages get broken. Just because a setup is below a 20dma doesn’t mean a thing.
Scaling out of winning trades before 2R destroys your expectancy.
Win Big & Lose Small
