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Effective Trade Management using Fractals

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One of the things that developing traders struggles with is trade management. A lot of time, the traders are good at identifying the market direction and even picking out good entries. However, as the trade progresses they get anxious. Either they hold on to the trade too long and give back all the profits or they get out too early, leaving money on the table.

How do I know this? Because I have been there myself J. I struggled with this for a long time. I would pick good entries but just didn’t know how to exit trades. I would get out of a really good trade early and then beat myself up when I saw the trade go another 100 or more pips in my direction. Other times, I would sit there and watch as my trade went from being profitable to break even and then turn into a loss, not knowing when to call it quits and get out. If you’ve done this, you know, it’s not a fun place to be.

I don’t believe we have to squeeze every penny out of the trade. However, we do need to maximize our profits and let our winners run. The question is…how we do that? Let me share one of the techniques that I have learned (from Chris Lori) for effective trade management that has proved highly effective for me. (Chris Lori is a Professional Fund manager. You can learn more about him and his offerings here).

This technique is about managing your trades using fractals. Fractals are the smaller areas of consolidation that form within the larger support and resistant zones. I won’t go into how to find good trade entries in this post. That’s a topic for another discussion. Here we’ll talk about managing your trade once you have entered the trade.

Let’s do this by walking through a trade I took recently. Below is a screenshot of the trade. The green dotted line is where I entered the trade. Based on my market analysis, this was a good place to enter the trade. I placed my stop above the apex (the red dotted line at the top of the chart).

Nov 10 EURUSDM15

As you can see on the chart that I marked up, my initial stop is at “0”. Once the price started moving in my direction and broke through to close below the support level at 1.2484, I moved the stop to the placed marked by “1”. The price then went up, retested the 1.2484 level, got rejected and moved further down, forming a fractal in this area. I then moved the stop to position “2”. The price came back, tested the backside of this fractal (marked by the yellow line) and then moved further down. As the price kept moving lower, I moved my stop along with it.

Nov 11 EURUSDM

Once the price moved below the 1.2444 support level, it started forming a fractal here (consolidating between 1.2435 and 1.2444). As the price broke through and held below 1.2435, I moved the stop to number “5” position. The price came back and re-tested the backside of this fractal but got rejected. As the price held below this area, I moved my stop to the number “6”position. At this point, we were heading into the end of the day and liquidity was drying up as can be seen from all the small candles here. I closed my trade at 1.2421. An alternative would have been to move the stop to “7” position and let the trade run. The stop would then have been hit in the London session, closing the trade.

The main point that I’d like to make here is to look for fractal formations and use these in deciding where to place your stops. Most of the time, the price will move in a staircase fashion, forming fractals between legs down. Look for these areas where price takes a breather before moving further and place your stops outside of these areas. This will provide a good framework for placing your stops and take the guesswork out of trade management. The more you practice this, the easier it’ll be to see the fractals and price behavior around the fractals.

Give this a try and leave a comment below to let me know how this works out for you.

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