Margin Trade Management, The Protection Of Capital

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Margin Trade Management, The Protection Of Capital

Posted on September 2nd, 2018 in Mindset by Tom Whitbread

Well managed trades really are key to consistent gains, and also breaking even on loosing positions when conditions change. A good trader can often find setups for profitable entries, but ensuring risk control and mitigating unforeseeable market changes are what makes the difference to becoming a master trader long term.

Focus

A distraction, unexpected phone call or interruption whilst making trade decisions, margin trading on high leverage could make a great trade, really turn out not so great. 

Mentally preparing yourself to be away from distraction and to be able to purely use logic and reasoning is a skill in itself. A brief time is all it may take, but if you cannot hear yourself think, with notifications constantly pinging you and IMs / alerts flashing up, unconsciously it could be taking your focus.

Be sure you can give all you attention to your analysis, as this will ensure you don’t miss read conditions and do not end up building a house on the sand.

Distraction is but one obvious risk of margin trading, although not the only one we must be aware too - eventually no matter how physically fit we are, trading fatigue will set in and even though we want to continue trading the session, we need to take a break at some point.

Training For Alpha

Trading fatigue can be avoided by daily cardio and interval training, combined with a physical sport or hobby and magnified by a good nights sleep, regular intimacy and healthy diet. 

A balanced diet of grains, fresh fruits, vegetables and herbs is crucial to your brains function, as is constant hydration. Make sure you are well hydrated when trading, coconut water or lime water are great to ensuring you stay hydrated throughout the day.

Sometimes you will need a booster, to keep razor sharp focus. For a morning drink, I prefer a cup of hot ginger, as it can be consumed without side effects in large quantities, every day and not effect sleep. Whilst giving good attention, refreshing the body and keeping the mind clear.

An espresso coffee is possibly the best instant tool for focusing and motivating ourself, but can leave you with an acidic stomach and sleeping problems if used too often, mixed with butter (often called bulletproof coffee) is a really great way to consume regularly as you get the caffeine hit and the fats from the butter prolong absorption, making it great for algorithm tuning, or trading long term positions for weeks at a time, and not loosing attention during the trade.

Another great herbal boost can be got from pure Korean Ginseng, although be aware it will raise your blood pressure and heart rate if used frequently enough. For those with a low bpi it could help (consult with your gp before trying), although often market moves can make blood pressure rise all on its own, so ginseng can make you feel a bit pressured unduly.

Personally - I only found this out about ginseng after months of drinking it (a honey moon period) and going a bit full on with it, suddenly my heart was pounding like a 60 a day smoker who had just climbed ten flights of stairs. 

I feel ginseng and companion herb gingko are definately nervous system boosters meaning reaction times felt improved, without the buzz a coffee has.

In moderation these foods can help you stay alert, although long term both physical exercise and rest is vital to keeping your edge. You can put high octane in the tank but you will need to service yourself eventually so take advantage of low times in the markets, take a break. Go somewhere new, spend time with family, get into nature and recharge yourself. 

Try to aim for trading to never take away your energy, but prepare for the market. Prepare for the fight. Don’t let yourself get overwhelmed chasing charts.

Letting Profit Run

Stopping trading entirely and going flat during a break may not be convenient, especially if volatility is high and a trade is progressing. So of course before leaving things to purely chance - we can ensure our gains, by setting a stop loss, and lock our profits in to let the market decide while we are away.

Maybe it’s a great trade and we wake up to much more gains, also what we cannot wake up to is any more loss, than the stop.

At it’s core, without talking about hedging, this is a crucial way to de-risk a position. It removes risk of  drawdown and means margin won’t be allocated to a negative position.

I believe trailing stops be it manual or software managed are crucial to any trading plan, in my oppinion a lot of money gets left on the floor without an effective trailing stop. Trading pure price action, scalping volatile sessions has always prooved easily that it has a relatively low risk with a trailing stop, that can be set to prevent a reversal whilst letting profit run.

Many trading books recommend using half the ATR (Average True Range) as a suitable stopping distance, it’s one way of trailing to a variable amount relative to price range, and subsequently locking in profit as you go. Of course additionally you can try trailing on the moving average, or previous high/low from N bars prior.

Each market feels different, for example a tight daily range that is trending, may compliment trailing the low from 3 bars prior on the 15 or 30 minute timeframes. Where as a larger day range with spikey swings could likely stop out too frequently if trailing so close, favouring the moving average to allow price action to consolidate and provide buffer to let the trade breath.

Some markets may be so range bound and move in clear levels that just stepping the stop up each Fibonacci level or significant flat area in a ichimoki cloud are also successful ways of avoiding stop outs from spikes, whilst protecting gains.

Nursing A Loosing Trade

The core principle a trailing stop ensures is once a trade goes into profit, those profits are locked in. This is a great way to ensure you keep your gains, although if the trade goes out of the money from the start and you want to just close it out flat or with minimal losses - a trailing stop also can help, albeit with some slight modifications.

To start off we need to calculate your break even + fees (including swap and spread) and your current stop loss level.

If you feel there has been obvious reason to abort your trade, due to for example a clear indicator giving signal that is contradictory to your position, start by asking yourself if you are going to get out here, why wait another %? If you are so sure it’s a goner, just start by looking to your stop.

If the market is showing no signs of reversing and it’s likely your stop will hit, you can start by trailing in. Move in one direction towards your entry price, and never extend a stop once you have decided it’s being shut down.

If you are still feeling neutral to the market, and there is not so much negative signal or world changing news coming - just a few days holding a loss position for example. The mind must be set on ‘when will I close?’. Every day you keep the position open is more swap (interest) if this is small and not an issue, then so be it. Although moving the stop up and trailing helps shorten the horizon, and allows you to free up margin once it closes out.

Closing out losing positions on margin early, is core to my margin trading strategy as you do not want equity allocated to loosing trades long term, it will prevent you from being able to take new trades and possibly play a psychological weight on your mind, continually seeing a net loss position, every morning/evening. It can not be conducive to a successful mindset, to just accept it, set a stop and ignore it is one way, out of sight is out of mind after all, as reckless as it may sound - although personally actively trailing a stop to me feels like I’m reducing waste.

Moving to the break even is the a crucial step of risk management in any trades lifespan, and ideally be done before leaving the trade for any long period of time.

All this means is when you are open and profitable, as soon as price moves above your given threshold be it candle / bar based or ATR / indicator based - moving your stop to just above entry (including spread and fees) means now you have removed risk entirely. 

Although it also means you have reduced profitability, as you may be taken out of the trade if the price bounces of your entry and continues to run later in your favour. To avoid this try to aim your entries at break out ranges, or significant levels where you can try to clearly go long the low, or short the high based on price structure from several days or weeks data. Using the swings and extremes from impulses, to position for mean reversal.

Using this method means allowing time for the price to form a pattern you can actively trade, and ensuring you manage the stop once profit runs accordingly.

To further reduce the chance of stops firing whilst we are gone we can use reasoning to set it just beyond the range we are trading, and using a odd number not a round integer such as for example $39.83 over just a easy round $40.00, because in terms of probability a odd number is less likely to hit then the round number.

For your strategy maybe you prefer using just a price alert, so you can decide to close the loss yourself rather than using actual stop with the broker. This is my preferred method as allows room for fast reversals, but requires you to stick to your trading plan like glue, and may not be advisable to new traders who find it hard mentally to close out at a loss.