Boosting the profitability of the trades and reducing the risks are among the key tasks faced by the trader in the financial markets. In order to achieve that, one has to combine trading strategy and risk and money management in a seamless manner.
You can do so by gradually accumulating a position - this is what big market players typically do in financial markets. Below, we shall examine how private traders can achieve it.
The first thing you need to understand is the logic behind the price movement of a financial instrument:
- a currency pair;
- raw material futures;
The market movement happens in several stages, the major ones being consolidation and growth or decline in impulse. It is commonly known that the key movements in the market are prompted by actions of the big players.
When accumulating a large position, they do so in several stages. Consequently, the chart will demonstrate price consolidation phases in the sideways ranges which are then replaced by a directional impulse movement.
In order to minimize own risks in trading, private traders can opt for the strategy according to which they gradually increase position size following the big players. Essentially, when trading with the trend, the trader opens a long or short position not with a large volume right away, but several small trades in trend direction. This allows moving towards the goal safely while at the same time minimizing the risks in each trade. This strategy is also referred to as ‘pyramidal’ accumulation of the trading volume.
Now, let’s take a closer look at an algorithm of this method.
The first thing you need to take into consideration is whether there is a trend in the market. You need to identify a down- or uptrend on a higher timeframe - e.g. daily or 4H one - and then go down to the working hourly or 30M timeframe and find the entry points.
It is vital to start accumulating position from the beginning of the trend and open the trades in the trend direction: we will go long in the ascending channel, and go short in the downtrend.
Second of all, it is important to perform a technical analysis of the price, starting from the higher timeframe and moving to the lower one, working time frame. Alternatively, you can set trend indicators if your trading strategy implies their usage.
Draw the trend line on the chart. If you notice a down (descending) channel, get ready to gradually go short.
Third of all, when switching to the working timeframe, you should track down the consolidation phases and price’s impulse exit from them. You can often spot local sideways ranges within the descending channel.
In this case, when trading within the global downtrend, we will go short from the upper boundary of the local sideways trend, moving a stop loss behind the resistance level.
When trading within the ascending channel, we will go long either from the lower boundary of the local consolidation ranges or by each bounce from the uptrend support line.
Fourth of all, you have to calculate the trade entry volume. To achieve this, estimate the approximate number of trades you are going open with the trend when performing the technical analysis.
Once you’ve done that based on the size of your trading account, determine the total size of positions you can open given the risk. Divide it by the anticipated number of trades. This way, you will get the volume for one entry.
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Rules for placing stop-loss orders will minimize the risks. When opening the first trade - let’s say a short position from the resistance line of the horizontal consolidation range - move the stop-loss order behind the previous local high.
When the price moves towards you and forms the next entry point into a short position, move the stop-loss order to this position behind the previous high as well.
You should move the stop-loss order to the first position to the level where the second stop loss is placed. This way, you will protect the profit in the first trade while reducing the risk.
When you open the second position and place a stop-loss order to it, drag the two previous stop losses to the level of the third one, and so forth.
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Therefore, by gradually increasing the position size when the price moves with the trend, you can protect yourself against major risks when placing one stop-loss order by a long-term position and maximize profits. This will leave you with a smooth upward yield curve.
What to know:
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