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.

    7 thoughts on “Left Brain Thinking”

    1. Hi Ray

      I think I will also consider where my entry price is and what other market context I have then I will consider the risk-reward.

      For this specific example I am more inclined to close my second position when I saw it bounced, especially if I shorted this position at around 0.85 and it had hit 0.8065,only 10 pips higher than 0.8055 —-the target.

      My thinking process is: when I saw a bounce, I may already saw price bounced to 0.81 level, so I can risk 155 pips or so to get my 45 pips potential profit or I can take the profit now and potentially earn 45 pips less,but remember I have my third position there,so I won’t miss a lot if I close the second position now.

      For this specific case, I feel that if AUDUSD hit the target zone, the bounce sometimes could be strong, that means the 200s pip trailing stop can be easily reached. I also believe that the target 0.8055 is only a reference price, the market can go lower than 0.8055, it can bottom before 0.8055,it can bottom at 0.8055. Even if I choose to wait for 0.8255 to be hit, the market can penetrate 0.8255 quickly and my fill can be much higher than 0.8255. If I shorted at 0.85 and got out at 0.83 for the second position, that is definitely no better than I got out now at 0.81.

      So considering all above I’d better close my second position now.

    2. If the bounce from .8065 is a CIT in the trader’s timeframe or first lower timeframe I will consider moving the 2 remaining positions @BE, at least.
      Or at the time the CIT is confirmed I am closing the 2nd third and the last one I move @BE.

    3. hi Ray,
      1. What is the bounce compared to the average bounce range?

      2. At that time, what is the daily range compared to the daily ATR?

      3. What are the weekly, monthly, quarterly support levels?

      4. Any related news to be announced?

      For non-discretionary traders, shouldn’t they exit as planned?
      – levels and/or time exit

    4. Hi Ray;

      1. if the bounce causes the price to be accepted within the congestion, I will take the position out. Reasons are – a different price structure is being formed (a spring CIT on the 5D). This may lead to a larger correction (mean correction magnitude from stats)

      I will stalk the pair for another opportunity

      2, And if it is a weak bounce (rejected by the PBZ), then I will hold on to the trade.

    5. Hey, should the traders answer the question:
      1. “Will the trend continue or change” before they make/plan the exit decisions?

      2. Also, the trade size relative to the capital size. If the trade size is very small, then …

      Depending on the subsequent price behaviour, any of the trade exits suggested could be the right decision (on hindsight).

    6. hi Ray,

      that’s what would i do:

      1. close the second third poistion for core profit as 0.8065 is at B (PBZ).

      2. for the 3rd position, let’s see what the market will do (act according to the trading plan).

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