kate682 wrote:Thank you, MightyOne, have now read the entire thread. Has opened my eyes to trading off extremes. Thank you.
I'm struggling with understanding adding to a position; halving of risk when you add a 2nd position, and would really appreciate anyone checking if my understanding is right. Xx
My understanding is:: I have 1 lot with a 25pip box, ie that's the stop; 25 pips. Once (if) position does not get taken out, I add a 2nd position @ +25, moving the stop of the first position and 2nd position to 1st entry position? At this point I would have worse case of price retracing, taking me out at break even on the first position and-25 on the 2nd position? Ie the same original risk.
Then I do it again? So at +50 from original entry I add a 3rd lot on a stop of -25, and also move 1st lot to +25, 2nd lot to break even, ie all the same stop figure - position 2 entry. So worse case is now a break even trade if price retreats to my 2nd entry position and this is on 3lots always keeping to your original entry ? risk!
Any help, comments much appreciated
Let us say that you go short 1 lot starting with a 20 pip stop.
Price does not move but you double to 2 lots and reduce your stop to 10 pips.
Price again does not move but you double to 4 lots and reduce your stop to 5 pips.
What is happening? Your stop is moving from the extreme and trailing closer to the current price.
And that is what we are doing, trailing stops to normalize risk (in this case at the orig. risk of $20).
If you follow the mini pillar pattern then you went from 1 lot to 2 and then to 3 for a risk of $3 over 5 pips or $15.
Your next step is to take the money, set your stop back at a nice strong extreme, and re-enter for 3 lots for a max risk of $15 + any money gained.
Going back to your initial entry for a second, if your max risk is $20 over 20 pips then you can enter at any price within the box, not just at your maximum.
We trade from long term extremes because we are eventually trailing our stops behind large chart extremes during long term trends.
We don't need price to move to increase our size, we just need the confidence that we can get away with moving our stop closer.
Our goal is to reach max or near max lot size BEFORE a long term chart trends.
Imagine you have $1000 and you reach a lot size of $5/pip and ride a run for 200 pips to double your account, 2% risk for 100% reward.
But don't be fooled into thinking that you need to size your lots like a day trader.
A risk of 0.15% over 15 pips can reach a 100% gain just as easily as a risk of 2% if the trade is measured in weeks.
If 13 losses = 2% then you won't hesitate to double and redouble.
If risk is normalized then you are risking 0.15%, or less, no matter high high the lots go.