This is a series of 2 articles.

Part 1
Trade management or money management? Often times it is confusing. I would refer to money management when choosing how to treat all of capital available for trading. For instance, trader wants to increase his lot size per each trade only after the capital has increased by 20%. However we would talk about the trade management when trader decided to move his stop loss to break even as soon as the trade has moved certain amount of pips in his favor. These are just two simple examples to illustrate the difference between both.

By knowing the proper ways of how to implement trade management based on a specific strategy trader can improve his overall performance significantly. Trade management is used mainly for 3 reasons which are to protect capital, to increase profits and to improve entry and exit.
These two articles will cover following techniques:
  1. Pyramiding ( averaging in or averaging up )
  2. Scaling in ( averaging down )
  3. Scaling out ( averaging out )
  4. Trailing stops
  5. Martingale and anti-martingale
Each of these 5 techniques will be covered in detail including variations. You will also see how it looks on a chart and will find out when each can be used to extract out of a market as many pips as possible.

Pyramiding

It basically means that trader ads to his position once the trade has moved favorably. This technique should be used only in strong trending markets.The idea is that trader assumes that the price will continue to move in the same direction and that by adding to his position he will be able to generate more profit. In the image below we see that price has formed a double top pattern at the resistance level. Trader places sell limit order if the price breaks through the support of this pattern. In this case initial stop loss is 30 pips. Once the price has moved another 30 pips another sell limit order is executed and the previous stop is moved to initial entry level to break even.As price continues do fall new position is opened each 30 pips and previous stop is moved also 30 pips lower.It continues until stop is finally hit. Use of stop loss is out of question as consequences may be devastating. It doesn't always have to be specific amount of pips to initiate a new position. One can wait for a retracement or a candlestick pattern to establish new position. The tricky part is knowing the size of each next position. Below the image You will see few examples and the differences on the results.


One approach that many novice traders use is that they double the size of each next position therefore putting more weight on each new position.But as we know trends don't last forever. So eventually last trade is a big loser and wipes out all of the profits if not more. Imagine what happens if they don't use the stop loss. Let's quickly calculate what would happen based on the trade example above if initial position size would be worth $100.
At the second entry level trader has a profit of $100 and he opens another position risking $200 with SL at the initial entry level.
At the third entry level there is a profit of $400 and a new position is established with a risk of $400.
At the fourth entry level profit is up to $1100 and now additional $800 is being put on the table.
At the fifth entry level profit is already $2600 and trader decides to invest even more, $1600.
Then finally SL is hit and trader suffers a loss of $500 instead of taking $300 if the method wasn't used.
2600 - 1600 - 800 - 400 - 200 - 100 = -$500
This just doesn't work as the further You double up the higher the loss there will be eventually.
You can get even more devastating effect if You use floating profit to establish the position size for a next trade, especially if the amount invested at each previous level is not subtracted from the total floating profit.

One of the correct ways to pyramid is to decrease the initial position size by 50% therefore giving less weight and protecting the profits already gained. As the base of the pyramid is always larger than the next layer. The example above is exactly opposite.
If we calculate the outcome of this method we end up with a profit of $418.25 instead of $300. Difference of 39%.

And finally the last variation known to me. This time each new position is exactly the same size as the initial one. As a result it would yield us a profit of $500. A difference of 67%. Latter is better than the previous in case the winning streak exceeds 3.

Depending on the strategy one of these methods can be used to increase the profit although also expose floating profits for risk and potentially turn winning trade into a loser. There is one improvement that can be made to protect from this. As soon as the second trade is opened move initial stop to lock in some profit, for example, equal to half of the 1R ( risk per trade) and place the stop of a second position also at the same level.Same with next position and so on. One can play around and find the most suitable way to use it.

Scaling in

This method is used only on pullbacks. The main task is to get a better average entry price. The initial position is split into parts as in image below.


There is two variations of this method. First is also called cost averaging. In this case we have a EUR/USD pair, there has been an uptrend and we want to jump in on a pullback and continue with the trend, but we don't know the exact level at which the price might reverse if it does. Let's say we will risk 3% of our capital on this particular trade. In order to get a better average entry price we will split our position into 3 parts, each 1%. We have a $10000 account, so total risk per trade is $300 or $100 per each position. Stop loss is exactly the same for all positions as well. First position has a stop loss of 73 pips, second is 52 pips and the third is 31 pips. Note how the lower the entry price the higher position size will be required to adjust risk to 1%. The potential target was set as 100% Fibonacci extension level. This also means that the price from the lowest entry point will have moved more than from the higher entry levels once the take profit target will be hit.

If we do the maths the first position will yield us a profit of $181, the second $292 and the third one $561 respectively totaling at the amount of $1034. If we had taken only one position risking 3% we would have had different results. It would depend on at what price was it initiated. If it was at first level the result would be $543 ( 47% less ), second level - $876 ( 15% less ), third - $1683 ( 63% more ). The benefit of this method is obvious, there is no need to pinpoint the entry. Although if we had taken three positions with as small stop as the last one we would end up with two losers each $100 and one winner $561 which would sum up as $361, almost 3 times less as with 3 separate positions. In my opinion this a very good method, in this case it loses only to the situation where we are able to pinpoint the right entry at the lowest entry level with all 3%.

The second variation of this method is that you would have to open three positions ( as per this case ) all the same size. Stop would also be the same for all positions. The drawback is that it is much harder to calculate how big the position should be in order to risk only fixed amount of money. If we do the maths then we see that we will risk $142 on first position, $100 on second and $58 on third. It is roughly $2 per pip. At the take profit level our gain is 459 pips multiplied by $2 equals $918. Which is less than with first method where it was $1034. Difference of 11%. The second variation puts less weight on the position with lowest entry level, completely opposite to the first one. However either one of them will yield higher return than taking single positions. Only drawback is only if one or two orders are filled, not all of them, then we are in the trade with incomplete position which in turn over the time could affect our performance.

I hope that you found some valuable ideas. The second part will cover remaining 3 techniques: scaling out, trailing stops, martingale and anti-martingale.
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