A trader\'s money management system

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c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come

Stop-Loss Exit Rules 61

move your stops to lock in profit. If you add on to your winning trade (in-

crease yourtrade size), your stop must be adjusted to keep your risk in

relation to your new trade size.

When adjusting your stop due to an increase in trade size, always move

the stop closer to your current position to lower the risk in relation to your

larger trade size. (An increase in trade size is usually caused by adding on

or scaling in to a winning position.) Once you do this, you should never roll

back your stop, since now your larger trade size will warrant the tighter

stop to maintain proper risk control.

Many traders ask about moving stops based on different time frames.

This is an advanced technique. As a general rule, always set your stops

on the same time frame as you entered the trade. In other words, if you

use a daily chart to base your trade entry, use the daily chart to set your

initial stop.

There are exceptions to this, but only after you have developed enough

experience. Become profitable using the same time frame first, and then

perhaps venture into multiple time frames later.

RULES OF ENGAGEMENT FOR OVERNIGHT

TRADES

For day traders, there is risk when holding trades overnight, since there is always

a possibility of unforeseen events occurring after hours. Unexpected events can

create agap open,which may adversely affect your account value.

For example, if you were trading a 15-minute time frame, your stop loss and

position size would be based on the 15-minute time frame. But, let’s say you are

five minutes from the close of the day and the trade is profitable and much more

profit is possible if you hold the trade overnight based on your 15-minute chart.

When this happens, consider five rules:

1. The trade must currently be profitable.


2. The 15-minute chart must indicate a solid trend in place.


3. You must set a new stop-loss exit based on thedailychart.


4. Reduce your trade size so that risk remains no more than 2 percent of
   your trading account based on the new adjusted stop from the daily chart.
   (Advanced traders, see important note following this list.)


5. Be sure to monitor the trade at the opening bell when the market opens the
   next day.

In this way you will take into account the inherent risks of holding the trade

overnight. This will not eliminate your risk, but it will reduce it.