Trader Question: What's your approach to reduce a stop loss during a trade?

There is so many things to like in the world these days. Kittens, you have to like those. Foot massages, definitely like those (perhaps a little too much), and reader questions. Love reader questions.

It takes me some time to get through them sometimes, and I can't always get into real detail, but last week a questions came in from Juan, asking about moving stop losses and locking in profits of trades.

With Juan's permission, here is his question, and my response.

Hi Adam!

Got a question about SL.

What's your approach to reduce SL during a trade? .In you weekly wraps you mentioned you usually don't take full risk losses, and that is also clear in your trade summary where almost all losses are below your initial risk of 2%.

It happened to me recently, that I got stopped out with a small profit of 0.5R because I moved my stops to quickly. Had I left them intact, would have made...~ 2 R.

At the same time, to make it in this game it's important to get some great r:r in some trades, and that means holding on a trade...through deep retracements, giving up profits etc, which go against your rule number of "No retrace".

So the question really is, how do manage to reduce SL, leave the trade room to work to get some great R:R, and not taking full risk losses?

I know you like to keep things simple, that's why I ask.

Thanks!!

These are the trade I talked about. Have to admit that the EURJPY one is a choppy mess.

Trade 1

Trade 2

Same case in EURAUD (1-2-3 play) which is still open, now at 1,5R profit so far... and retracing..😓😌

Trade 3

Best, Juan

These were three pretty decent entries. Unfortunately the money is made at the other end of the trade, so Juan's frustrations are understandable.

I found the process of this useful for both Juan and I, so perhaps this will help you to.

My reply to Juan, soon to be trading extrordinair
Hey Juan,

Thanks for the emails, and the example help as well.

Firstly you are right to concentrate on risk/reward (RR), it is vital if you have a trading system that does not have a high win rate like I do (~50%). If you have a system that has much higher win rates, than a RR closer to 1.5 are more viable.

In regards to taking trades that have the possibility of good RR while avoiding the need to hang on to deep retracements, I always liked to concentrate on the "meat" of a move, or the third wave if you are into wave theory.

Whether you believe in the rules and strictness of Elliot Wave (I don't), the principle that the third wave of a move is the strongest has proven itself for as long as the markets have been running.

It makes sense logically when you think about it of course, the first wave indicates a new direction, the third wave sees everyone jump on board after seeing that indication, while the fifth or later waves more often than not are short term speculators or late-comers.

So to answer your question, when I say no retracements, that is what I refer to. If I happen to be on wave 1 of a move, I don't want to hang on through a retracement and open up the emotional temptations that brings.

Instead, I'd rather be off, and waiting to get back onto the the bigger wave 3 with more equity and a clearer mind.

In terms of the examples you provided, I'll see if I can go through them one by one, but I'll preface this of course that hindsight makes this easier than it ever would be live.

Trade 1

This is a good solid trade, and one I would have taken myself. The question is regarding the stop placement, is that a place you would consider the trade to be wrong, or just a calculation?

For me you are trading a 1-2-3 (or A-B-C) reversal here (which is great, such good RR), and you are trying to buy the start of the profitable wave 3 (excellent).

I would consider this trade to be wrong if it broke new lows, that would confirm this was not a 1-2-3 reversal after all and you were definitely wrong.

Of course this would have reduced your trade size to increase the stop size, but there was a good 2 or 3:1 trade there.

Trade 2

Another really nice trade, solid entry, especially the entry after that retracement has done a second move down, giving it time to rest and coil. That is your first hint that a more optimistic profit target was in order.

The fact the retracement took three waves and some time to form, means it has the potential to use that stored energy to spring further though the highs.

Now that move proved stronger than I thought it would, but moved in a nice straight line making it easier to hang on for the ride.

A hint, look at the retracement before the one you are trading and see it's structure. If it has three waves, there is a good chance the next one will as well, they tend to follow patterns.

With my trades I always look for a pivot to be broken before I get out, it is those stops and losing traders that will fuel a strong move and good RR.

With all that said, that trade was a good one, the question is, could you have jumped in again on the next retracement?

Trade 3

Not sure if you hung onto this to allow the Friday spike to take out your profit target. Hopefully you did.

It's another nice trade, but remember the key to the profitability of 1-2-3 trades is that you are trying to get in for the big move which would indicate that has some way to go beyond that profit target.

The risk we run as 1-2-3 traders though is we might actually be catching the last of a smaller retracement series (usually three waves) so locking in break even when a move breaks new highs like this one did when it broke 1.4480 is a good idea.

With good entry execution like your has been, that should avoid a loss, but keep you well clear for the strong move up if it comes.

Overall mate I would say all three of those trades were nice trades, but remember two things:

Stop losses are for where a trade idea proves itself wrong
What makes a 1-2-3 trading system profitable is remembering it is the strong third wave (which is usually larger than wave 1) that we are trying to capture. Essentially trying to jump in front of the crowd and let them push us along and jumping off before that wave crashes back down (the deep wave 4 retracement).
I hope some of that helps, and apologies again for the slow reply. Have a look into market structure theory (accumulation/distributions etc.) when you have a chance as well, it will help with these kind of trades.

Have a great weekend.

Happy trading.

Cheers
Adam