Getting Properly positioned

How many of us have experienced a profitable trade turning into a stop loss disaster? Or, on the other hand, a trade that went bad from the beginning then getting stopped out exactly when the market reaches a key reversal point and makes good? These occurrences cannot be fully avoided, but we can reduce their occurrence by better managing our trading positions.

Let’s start at the beginning. Before you open your position, it’s important to document the current situation, from both a technical and fundamental perspective.  The first means mark the price at which the trade is executed. According to the horizon of your trade, (be it hours, days or weeks)  capture the current level of key indicators such as  the 20, 40 and 89 exponential moving averages, and mark the first and second support and resistance lines (if you are proficient in channel plotting  that could be of use as well). One should also record the level of key indicators like MACD (moving average convergence/divergence), stochastic and RSI (relative strength indicator) levels.

Arguably even before you get to this stage, though, the question you need to ask is: Which time frames should I use. The consensus configuration among professional traders is that scalpers should use 1, 5, and 15 minute charts, day traders should use 5, 15, and 60 minutes intervals and swing traders 1 hour, 4 hours and the daily chart. Those who look to trade positionally should look at 4 hours, daily and weekly numbers.

There’s good reason why we have three time frames for each type of trade. The longest is used for market perspective and the ‘long’ term trend, the middle is the one upon which you would decide the direction of your trade, and the last is merely to optimise the timing of entering into the trade.

Let’s assume you have a long position open with a day’s trader perspective. You would be using the hourly chart, and it’s important to watch out for key signs, such as getting close to support and resistance; price action can be erratic around these levels. Watch also the main overlays for any kind of moving average cross over (MACD). If the MA20 line crosses under the MA 40, it may indicate a trend reversal.

The indicators can tell you a lot – mostly the MACD. If you’re trading a long position you should expect the MACD line to positively diverge from it’s signal line – watch out for ‘fake’ crosses – while a negative divergence should alert you to a possible reversal. Those signals don’t always indicate full trend reversal, it might be just a correction or the market is taking a breather, but you must be alert and vigilant when they occur.

Fundamental analysis, meanwhile, is trying to capture the current sentiment in the market. You have to be aware of the general price direction, what fundamental information is driving that price, and what are the up-coming expectations. The common tools for that are economic calendars, especially the detailed ones that offer some market commentary as well.  

Last but no least, decide in advance the different potential courses of action, both for better and worse, of where, when and how to make your exit.  Just like the prior examples, the reasons for doing this (and the movements that prompt you to exit) can be both technical and fundamental. A good example for a technically-influenced exit would be to set a breakout or a breakdown over the current trading channel, or a high-probability reversal pattern such as a ‘head and shoulders’ formation. A fundamental reason would be to revaluate the trade when a GDP, unemployment, or a relevant interest rate announcement is expected. This sheet should then guide you when you monitor your open positions.

So far, the easy part. What’s harder is managing yourself when there is money on the table. It’s very hard not to give in to one of the two most basic desires – fear and greed. Fear will appear whenever the market is trading against you, either creating a loss or eating into unrealised profit. At this point, it’s critical to make an effort to stay rational and analyse the situation. Check: has something materially changed from a technical or fundamental perspective since the position was opened? If the answer is no, then you must be strong and stick with the plan. On the other hand when profits are running and you have reached your target, unless something again has materially changed close your position, or you will suffer - perhaps not this time, but some time soon - from greed.

The other more dangerous manifestation of greed is actually when a trade is going against you and about to hit your stop, and you decide to extend the stop. In most cases this will just make you lose more money; do not fall into this trap. It’s much more probable that your analysis, made before there was money on the table and greed preying on your mind, is still accurate. 

Another, and more proactive, manner of managing trade is hedging. Just to be clear, opening an opposite position on the exact same instrument is NOT hedging: it’s a waste of money. Hedging is a position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market, with the goal of minimising your exposure to unwanted risk.

Therefore, if you want to use hedging, which is an advanced method of managing risk on your open positions, you need to do it on a different market. Let’s assume your medium term perspective (3-6 months) on the EUR/USD cross is bearish, therefore it would make sense to sell the December futures contract. It might be that while this position is running a shorter term analysis is indicating a bullish correction. At this point you can either use the October or the spot contract to hedge your position; it can be a perfect, partial or even an over-hedge. Another more advanced technique for hedging would be to use OTM (Out Of Money) options, but this requires a much more detailed analysis as a whole new level of complexity is introduced when trading options.

Another consideration that one should take into account is the trading session. In the UK we have three major trading sessions in the day: Asian, European and American, though some overlap with the others. Some traders prefer to close their position when the underlying market session is over, while others are happy to keep their positions open overnight. 

If you decide you wish to keep position open after market hours or just let them run while you sleep it is highly recommended to take protective measures before signing off. A lot can happen while you sleep, therefore revaluate your stop-loss order and consider adding a limit if you don’t already have one.

As I hope I’ve outlined, managing your positions is a serious and complex craft which can have a significant impact on your trading results. It all starts by making a well-informed decision and documenting relevant information, followed  by a building a rigourous regime with a central message: stick to your plan.

Good luck and happy trading 

Shai Heffetz 



Spread betting carries a high level of risk and you can lose more than your initial deposit, so you should ensure spread betting meets your investment objectives. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.