Left Brain Thinking

BarroMetrics Views: Left Brain Thinking

Picture this:

  • You are short the AUDUSD.
  • You have exited 1/3 of your positions so that the remaining 2/3s, if stopped out, would be a ‘no-‘loss’.
  • You are looking to exit the second third at .8055.
  • Your stop is some 200 pips away, say .8258.
  • The AUDUSD gets to .8065 and bounces, what do you do?

I am coaching a couple of students who, on Friday, sent me their trade management plan for the AUDUSD shorts; they were preparing for this week’s trading. One did not even consider the possibility of a bounce; the other, took the view that unless his second third target was met, he’d take the stop i.e. either .8055 or .8258 whichever comes first.

What would you do? Send me a comment. 

Oh, let me provide some context:

  • The first third exit covers the loss on the remaining open positions at the initial stop level.
  • The second third exit is taken at a level assessed by the trader. It represents his core profit level. On exit of the second third, the stop on the last third is brought to breakeven.
  • The last third is exited on a trailing stop basis or on a change in trend pattern occurring in the trader’s timeframe.
  • Rational for the process:
  1. the first third is for protection;
  2. the second is where you derive the bulk of your ‘normal’ profits;
  3. the last is the ‘exceptional return’: more often than not you are stopped out at breakeven. But the time when you are not stopped out at breakeven, the times when you see a return of exceptional gains, these times make up for the breakeven stops.

    More after your comments.