Forex Strategies and Tips
Exit Strategy: Retrace Runner
As we discuss in our article About Exits, there are 2 basic kind of exit plans: Active or Passive. This is an active plan, because you manage your trade as it progresses by moving your stops.
It is a very tight rule plan that we created and have named the Retrace Runner, because it uses retracements to mark your positions, while letting the trade run as much as it can to maximize profit.
Price Pulsates Like Breath
This is a principle that may take you awhile to really incorporate into your thinking?
Why? Because you naturally want price to run to your take profit as fast and as directly as it can.
Well, it may get there – but seldom as directly as we want it to.
Once you understand that price moves in waves, in and out like the breath, up and down like the tides, you can relax and be more at ease with the time it takes and the process it goes through.
The trick is to hold onto the movements of price action as though it were a baby bird in your hands.
If you hold the bird too tightly, you will injure it.
If you hold your stop too tight you will get stopped out and never give the trade a chance to develop and give you all the profit it can.
If you hold the bird too loosely it will fly away.
If you hold your stop too far from current price action you may not capture what pips you see and unexpected events could reverse all the progress of a trade before you can secure them.
If you are going to actively manage your stops, you need to find a method that is a balance of close enough but not too close.
Retracements – The In-Breath of Price Action
Technically you could call any consolidation or pause in the action a form of retracement, but the kind we're looking for in the use of this specific exit plan is a retracement that creates some space or room away from the main move.
Think about being able to put a little ball inside the space created by the good retracement. A good strong retracement can completely fit a ball inside it. A weak retracement... well, you'd have to squish the ball or have it sticking up outside the retracement.
So from here on out we'll only be counting good, strong, clear retracements for the exit plan.
Rules For The Retrace Runner
You enter a trade. Let's say you sold - you're in a short trade.
Price moves down in your favor.
When do you move your stop loss to start locking in some profit, or at least reduce your potential loss?
Only after price has pulled back into a good retracement and then made a lower low.
Where do you then move your stop loss?
Above the highest point of the retracement itself.
An Example Trade
Here is a very typical trade using this technique. Before you examine it, think what stop management system you would use and compare what profit you would have made.
The entry system used in this example is our own technique, BOB.
How To Capture A Big Move
There are times when price moves dramatically in your favor, but you just don't have a place to move your stop following the rules of this plan.
We saw that in the above sample trade here. Price moved down quite a distance before we could move our stop.
When this happens the option we recommend is to move your stop to the price that is most likely to be retested before the move, and to give it a little extra pad above that.
To identify that point, look back at the previous low you were waiting to see be broken.
Put your stop just above the yellow band, so price has room to retest the level without taking you out.
And sure enough, later we see price retest that level. If we used a pad we would have been safe and alive to reap the full potential of this trade.
NOTE: In using this technique, it is critical that you understand BID and ASK correctly. If you don't – you could have correctly planned this trade but been stopped by a mistake you can easily avoid. Understand Bid and Ask!