What's that — "realistic trade management?"

Well, it's not what you might think.

Realistic trade management is generally assumed to reference how to manage an active position. That management could involve such activities as scaling in or out of the position, trailing stops, looking for change in supply/demand sentiment, etc.

And those are all very important trade management considerations that must be understood.

However, there's a broader view to "realistic" trade management that I think is far more important than just the 'activity' of managing a trade, i.e. the "stuff" of watching over an open position.

Realistic trade management must be premised upon having a realistic goal for taking a position in the first place.

By the way, I have a companion video of the same title: Realistic FOREX Trade Management that puts all of this together from a different view point. If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

Okay, but how do I get from 'trade management' to 'goal'?

Well, why do you manage a position in the first place? It's to maximize the profit outcome, right? Sure. So, the profit represents the goal.

If you have an unrealistic goal, then your chances of achieving it are pretty slim — regardless of how well you 'manage' that position. I don't have to go into all the philosophical ramifications of any of that because it's all pretty evident.

The primary metric used to determine what a 'realistic' profit goal would be is totally dependent upon the time frame the initial trade analysis is done on.

While a profit target of maybe 100 pips might be fine for an intermediate time frame like the 4 hour where you're doing short swings, it would be absolutely unrealistic day trading on the 5 minute.

Most educational resources teach structure levels formed naturally from the price action on the time frame you choose to trade on. And that's absolutely true — for the mechanics of trade management. But, as I've said, the mechanics are the tail that the goal dog wags. If you don't have the proper goal, then the mechanics are going to fail.

Now, that all just sounds totally convoluted....

Setting a goal is an intellectual pursuit, whereas the mechanics of trade management are more tangible — like trailing a stop, for example. Though trailing a stop may help you get to the goal, it's not the goal.

You can't say, "Oh, I've got a great trailing stop that will capture as much of my profit target goal as possible," because that's not the profit target goal; it's just a profit target with nothing supporting it other than whatever metric you used to determine that goal, and the tools you are using to assist you in achieving it.

And that really has nothing to do with what the true 'goal' is, let alone a realistic one....

I've identified that a realistic profit goal is determined by the time frame being traded. But what does that mean?

It's a little easier to discuss and visualize this from the view point of a day trader on the 5 minute chart, but the rational is easily projected up onto any time frame. It's easier on the 5 minute because all of the price action that you'll need in your analysis is compacted 'close' to the hard right edge where you'll be making those decisions.

You can look at structure for trade entry analysis, but not for a 'realistic' profit goal. Structure may indicate a profit target goal, but it doesn't have anything to do with the goal of the trade itself. Structure creates boundary zones for you to do your trade management, but a boundary zone can't be a profit goal.

Determining a realistic profit goal (minus the 'target' qualifier) lies in your ability to step back from the clutter of that structural analysis and determine how far price could go if there was no structure.

This is done by current multi candle momentum analysis.

ATR is a general measure of price momentum over a sample size of usually 14 periods. This gives you an average candle range of relatively near term price action. And this is true regardless of time frame.

Thus, near term candles that are not only rising, for example, but which are also larger than the ATR become signals that something may be happening to order flow.

This change in candle size from the average ATR is a sign of increased price momentum.

And when those near term candles start to become larger than the largest candle in the ATR sample size, then that's an indication of sustained price momentum.

It's your ability to correctly interpret that price momentum to extrapolate out what potential move price has.

There's a little more to the analysis than that, of course.

For example, just looking at the dog, i.e. the momentum, is insufficient information to determine how far that price could go. You also have to look at that dog's tail to determine the effect the wagging has.

I've done this mathematically by looking at the equations of the physics of wave formation and propagation, and then striped the math out so that I could teach this graphically to non-technical students. It's really not as complicated to get the gist of as it might appear, though the math itself is senior college level physics, and not for the faint of heart....

But I did want to at least share what the framework might look like for the analysis of setting 'realistic' profit goals, and thus define the underlying construct of having a realistic trade management plan.

Video: Realistic FOREX Trade Management