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Trade Protection
The most important consideration in trade profit and wealth accumulation is not so much the size of your winning trades, but management of trade loss.
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Consider the following Company best practices:
Trade Plan – Before placing a trade, have a trade management plan in mind.
Trade Protection – Never leave a trade open without some type of mechanism to address any possible trade losses.
Address Trade Losses – If a trade hedge is used, do not just let them float through time, but address them actively to remove the hedge as soon as practical.
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Basic Trade Protection:
Stop Loss
Example:
Place sell trade
If the market move up a sell loss is created.
Exit sell trade
When the market move a certain distance against the trade then exit the market with a loss.
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Accepting the loss of closing a losing trade at a certain market price. This is the simplest trade protection approach, and should be the last option. Effort must be taken to become familiar with better trade management strategies.
Price Averaging
Example:
1st Sell
Say, the market move up creating a loss
Sell a second time
When upward moving market reaches its local peak
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Same direction trade improvement
1st Sell gets increasingly less of a loss as the market moves down.
2nd Sell increasingly gains profit from the peak downward.
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Close
When 1st Sell reducing losses = 2nd Sell increasing profits.
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An approach where the price moves against the given trade, but eventually set up for another like trade. For instance a sell trade is taken, the market moves up but set for again moving down. Then place another sell trade at the top of the market movement. The second sell trade profit grows positive as the market moves down, and the first sell trade becomes less negative as the market moves down. When the increased profit of the second trade equals the decreasing loss of the first trade, then both trades are closed. A net zero account loss occurs. Close the negative trade first.
Hedging
Example:
1st Sell
Say the market move up creating a loss
Place a buy
When the market moves a certain predetermined amount.
A loss is locked in
The sell loss increase, at the same rate that
The buy profits gain as the market moves up.
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Exit the buy
When the market reaches its local high.
Exit the sell trade
As the market moves down and the sell loss is minimized to equal the buy profits or better.
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As the market then moves down then the sell loss continues to be reduced until closed. Often the overall sell and buy combination can result in actual increase in trade balance. A buy example would simply be the opposite trade action and opposite market movement. An approach where there is a buy and sell trade active in the market at one time. That is if a buy trade begins to lose, then at a predetermined loss a sell trade is made. The result is a locked in loss to be managed later. As the buy trade loses with downward market movement, the sell trade gains a profit. This locked in loss can be minimized by removing.
Combined Price Averaging and Hedging
Example:
1st Sell,
If the market move up a sell loss is created.
Place a buy,
When the market moves a certain predetermined amount.
A loss is locked in
The sell loss increase, at the same rate that The buy profits gain as the market moves up.
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Exit the buy,
When the market reaches its local high.
Place a 2nd Sell Trade
Also at the market top, place a sell trade.
As the market moves down an immediate profit is made.
Exit the 2nd sell trade
When the market reaches it local low.
Exit the 1st sell trade
As the market moves down and the sell loss is minimized to equal the buy profits or better.
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