Risk Reduction Target (educational)

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Hello, money management is very important after entering a trade. Lately im using this money management system called "risk reduction target".

This is because i saw many times a trade is going in my favor (lets say 50 pips, not bad) and after that if my analysis was wrong price suddenly goes against me and touches my SL. I felt dissapointed not only because i lost a trade (this is always possible off course) but i lost that 50 pips that were already mine.

This money management tries to avoid that situation, is based on probatilities and consists on following:

For this example lets say 1 pip= 1 dollar

I open three positions at current price:

- Stop loss for all positions: 100 pips
- First target: 50 pips
- Second target : 100 pips
- Third target: leave opened ("lottery target")

At this stage im risking : 300 pips (300 dollars)

Even is price moves completely randomly there is a great PROBABILITY that will touch the first target and not my Stop Loss, simply because its nearer.

Lets say price moves 50 pips in my favor and touches my first target, i modify the SL and target as follows:


I have already 50 dollars on my pocket and simply move SL another 50 pips.

At this stage we have:

- I have three positions opened. Total risk: 150 pips (us$ 150 dollars)
- I took already 50 pips profits (us$ 50 dollar)

I price goes in my favor from here off course everything is wonderfull.

Lets be negative and assume trade goes against us and touches the stop loss. In this case we have:

Total loss: 150 dollars - Total profit: 50 dollar = us$ 100

We see the total loss was only one third (us$ 100) compared with the original us$ 300 potential loss. This is a great thing and happens most of the times because price simply usually touchse the first target more often than not.

The main advantage here is the first target called RISK REDUCTION TARGET.

Best regards.

Comment: Correction:
I did a mistake, after taking first profit we have TWO POSITIONS opened. Then move stop loss 50 pips.
At this stage we have:

Total risk: 100 dollars
Total profit: 50 dollars

IF price goes in my favor= wonderfull

IF price goes against and touches both SL we have finally:

Total loss= 100 dollar - 50 dollar proft = 50 dollars

50 dollars: that is 1/6 compared with the original 300 dollars initial potential loss!!

I thinks this MM is very powerfull because it reduces the risk AS SOON AS POSSIBLE and will keep us profitable in the long term.

Remember: ***********
Professional traders always consider first HOW MUCH THEN CAN LOSE, novice traders on the contrary always think "HOW MUCH THEY CAN GAIN".
Very smart approach i must say
Good, you can also try to reduce position after 50% of the stop distance is reached, and let it run as a 'gamble' and forget about it.
Sometimes it keeps trucking, but you would be tempted to get out otherwise. This improves expectancy as well.
FullTimeTrader IvanLabrie
Thanks for the advice. I prefer to open three different positions because sometime price moves very fast and there's no time to reduce a position. The idea is the same.
+1 Reply
IvanLabrie PRO FullTimeTrader
Yeah, just different application.
I like both, but I hate it when it gets to the ultimate target with reduced lot size.
I switched to trying to add every chance I get and maintain risk equal now. It's a bit better for my mind.
+1 Reply
Koryphaeen PRO IvanLabrie
Don't we all hate these kind of situations? But I hate it more, when first TP is hit and then PA moves to SL suddenly which means half of the total profit already earned at TP1... ;) instead of three times of it if TP2 or six times of it if TP3 are hit with reduced position sizes... mathematics... ;)
Your MM in my understanding is a kind of "when first target hit, closing one position of two and moving the SL to break even" kind of MM, to maintain the chance for targets 2 and/or 3 to get hit as well. I can tell you that according to my statistics (let's take my Gartley pattern trades history for instance, which is in positive outcome/profit) I would have made more money/profit if I would have closed my both positions at Target 1 instead of closing just 1 and for the 2nd move SL to break even... So, a real life statistic can, should, be made for your MM strategy as well, surprises can occur... :) but a MM (term which I use only for defining a position size before I launch a trade, based on a proportion based mathematical calculation of my equity and assumed potential loss) and a Trade Management (term which I use for managing my trade once launched based on PA and other signs of weakness and/or strength incl. moving SL or closing all once TP1 is hit etc.) can be and should be used anyway, otherwise a "struggling trader" will be born... :) my view only out from experience, because I was once a struggling trader too...
+2 Reply
IvanLabrie PRO Koryphaeen
This is a good idea.
Probabilities favor having bigger TP than sl.
So, reducing position when half SL is hit, but not before hitting targets makes more money in the long run.
Always good to test for your specific application.
Van Tharp covers this:
+2 Reply
FullTimeTrader Koryphaeen
Hello,thanks for comments:
- Im not considering here position sizing to make the post simple but we should consider that also into this complex equation. There are fixed and variable position sizing systems.
- Every system has pros and cons. I would say the main advantage here is that we reduced risk as soon as possible (opening three positions). The main disadvantage it that we took profits too soon and we could miss a potential big reward. We could also be spiked out before price going in our favor.
- Im not talking on my post about the third target, wich sometimes turns to be a long term profitable trade using a tested trailing stop strategy.
- I agree the PA is the most important thing here because not all trades have the same probability. Having said that this system could not be suitable for all traders. I like it because i always try to enter at the best price and have the SL very small.
- Not the "best" system for sure, just wanted to share it.
Best regards.
+2 Reply
IvanLabrie PRO FullTimeTrader
There's no best system. It just has to have an edge and suit your personality.
I can't use it because I'm tempted to exit early, always. I need something to force me to stay in, so I increase size only, or decrease if the stop is near.
Great stuff you post, keep it up.
+1 Reply
Koryphaeen PRO IvanLabrie
I had that urge too, to exit early, especially when I was near a profit target or when I've seen some kind of reversal in favorable PA... a mistake greenhorns are making. I succeeded to overcome it, but it's really not easy to sit and watch... ;)
Koryphaeen PRO FullTimeTrader
I agree with all what you say. In addition I would like to say, what I said before, that it is very important to test or back-test it, because there are situations, like in my case with my Gartleys or Butterflies, that when you back-test a this kind of strategy you are talking about, you realize that it is more profitable when you take out all your 2 or 3 positions at the first TP target instead of letting it flow in hope for TP2 or 3. It is very strange, I was stunned also when I calculated this out, but it's math... :) It's another story if you use trail stopping from the 1st target on... that I have to test it, but it's not so easy because every situation is individually diverse and subjectivity is in play, so no standardization is possible. Anyway, I like your analysis very much, all of them, especially the simple yet complete reasoning you are using which lies behind your analysis. Keep on with them! ;)
+1 Reply
I would be very interested to know your opinion about the following setup:
FullTimeTrader Koryphaeen
Hello, the internal structure of this pair is not very clear and im not using EW to analyze it. After that strong decline price usually consolidates for some time, so I expect some consolidation and then the decline to continue, may be one more leg down, i mainly based on fundamentals. Right now im staying aside but will be looking for harmonic pattern setups near current area. Regards.
+1 Reply
Koryphaeen PRO FullTimeTrader
thank you for your opinion, I appreciate it! I will also look for a harmonic pattern, but to go long on this, with the strategy discussed before, with trailing my stops after TP1, let's see what can be made this way.
Thank you.
I wouldn't go long until we hit spring lows.... ECB wants to see it around 1.0000.... so no longs until price tests around that zone....
wow! Great! This is a whole lesson on money management. Thanks
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