Trade Management

The Key to Trading Success

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The Most Important Aspect
Most new traders tend to
concentrate on getting the
perfect signal. This is
probably due to the fact that
they are still thinking along
the lines of a buy and hold
approach to investing.
Experienced traders know
that perfect entries are only
attainable on the left side of
the chart. The true key to
trading success is in the
way we manage a trade.

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The Keys to Trading Success
When we look at how successful traders are able to consistently make
money in the markets, we see that their strategy has more to do with
protection than any other factor. By practicing trade management
techniques that are geared more toward defense than offense, they
are able to stay in the market and take advantage of the moves when
they occur.

The 3 Keys to Trading Success:

ü Protect Your Equity

ü Protect Your Profits
ü Be In the Market

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Protecting Your Equity

In business, if you run out of

inventory, you are out of
business. In trading, your equity
is your inventory. Protecting your
trading account insures that you
can stay in the game.

There is no more important

aspect of trading than protecting
your equity.

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The Reality of Losses

When we look at the gain required to recover from

losses, it helps put the importance of loss
management in perspective.
Percentage Lost in Account Percentage Required to
Recover From Loss
25% 33%

50% 100%

80% 400%

If we are to make money by trading, we need to make sure that

our losses are kept to minimum. By doing so, we are able to
more easily recapture from the loss and begin to add to our
account equity.

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You Control Your Losses

The ONLY aspect of trading that you truly have control over is
how much you are risking on a trade. Profit is outside of our
control, but risk per trade is defined by the trader.

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Protecting Your Profits

Almost as important as
protecting our equity is the
practice of protecting our
profits.
Handling profits is the aspect
of trading that most greatly
reflects the impact of fear
and greed.
Our tendency is to take
profits quickly but to let our
losers run, but in reality we
should be doing the exact
opposite!

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What is Protecting Profits?

When we first hear the phrase ‘protecting

profits’, we might think that this means we
should quickly take any profits we have earned.

Protecting profits means having a method in

place to protect your earnings while you are still
in the market.
Protecting profits allows us to
keep the money we have
earned in the market without
removing our earning
potential.

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Small Gains vs. Big Gains
Account A Account B
Winner or Loser Percentage Winner or Loser Percentage
Lost/Gained Lost/Gained
Win + 3% Lose -1%
Lose -2% Lose -2%

Lose -2% Lose -2%

Win +1% Win +6%

Lose -3% Lose -3%

Win +2% Lose -2%

Win +2% Win +5%

Lose -2% Lose -1%

Win +3% Win +8%
Lose -2% Lose -1%
50% Accuracy Even 30% Accuracy +7%

“Riding a winner is a better proposition than finding a new winner!”

“The big money is in the big moves!”

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Putting Together a Trade Plan
We know that we need to keep our losses small, and we also
need to maximize our gains while protecting our profits. By
incorporating a set of exit rules that are designed to achieve all of
these goals, we can create a Trade Plan that will greatly increase
our odds of trading successfully.

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Developing a
Trade Plan

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 What Kind of Trader Are You?
You must evaluate yourself as a trader
in order to develop an effective Trade
Plan. Points you should consider
include:

1. Your Trading Experience

2. The Type of Security You Trade
3. Your Trade Term
4. Your Risk Tolerance
5. Your Short and Long Term Trading
Goals

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The Components of a Trade Plan

In devising our Trade Plan, we need to carefully

consider the components that will help us realize
the three keys to success.
The initial entry signal is what allows us to
engage the market.
Once we take the trade, we need a method in
place to protect our profits. And of course, once
we make money on the trade, we need a
method to protect our profits that will also allow
us to maximize our gains.

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Protecting Equity with Loss Stops

Before we enter a trade,

we need a method in place
in order to assure that we
exit the trade once our risk
tolerance has been
realized.

Loss Stops are used to

help us protect equity. The
balance between limiting
risk and allowing a trade
to mature is a delicate.

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Maximizing Profits with Profit Stops
Once our trade has made gains,
we need to have a method in
place in order to protect our
profits while maximizing our
gains.

Profit stops can exit a trade

after a certain amount of profit
has realized, or they can trail
the trade in an attempt to
capture as much profit as
possible.

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Constructing a Trade Plan
In Summary, We can build a Trade Plan by putting
together the following components:

1. Protective Stop (Protect Equity)

2. Profit Stop (Protect Profits)
3. Special Event Handling Stops (Optional)

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Types of Stops

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 Types of Stops
In technical analysis, we
can break different exit
(stop) methods into 4
different categories:

1. Chart Based Stops

2. Indicator/System Based Stops
3. Volatility Based Stops
4. Percentage/Point Based Stops

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Chart Based Stops
Chart Based Stops use
chart information in
order to determine when
and where the best
point on the chart would
be to exit a trade.

Chart Patterns are

excellent tools to help us
determine optimal exit
points.
A support level provides an excellent
loss stop on long trades

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Indicator/System Based Stops

Another tool the technician

has available to help them
exit trade is the use of
indicators or systems.

OmniTrader owners have

various indicators and
systems available to them
that provide excellent exit
rules. The iTLB systems in
particular show outstanding
potential as exit tools.

The Momentum iTLB system

provides an excellent exit signal on
this chart for Verizon

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Percentage/Point Based Stops

Many traders will apply their

stop levels based on a
predetermined percentage or
point move.

This method can be effective

when applied to only one
security, but it has limitations
when we attempt to apply it
across a list of securities due
to the difference in price
values.

A stop that is set 2% below entry

price is displayed on the chart for UTX

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Volatility Based Stops

Volatility Based Stops use a

securities typical volatility, or
day to day movement, to
determine stop levels.

Since the typical movement

of a security is relative only to
that security, this stop is a
more effective method when
we are applying a Trade Plan
across a universe of
securities.

A Trailing Stop based on the securities

average volatility displayed on the
chart for UIS

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 Definition: “What is ATR?”
• Average True Range (or
ATR) was developed by
Wells Wilder.

• It is calculated as the
average daily range (High to
Low) over a given number of
periods (usually 14).

• For stops, we use ATR

instead of a percentage
because ATR more
accurately reflects the
LIKELY movement of the
symbol.

Click in any chart to get the Data Window

crosshairs, showing ATR at the point of the cursor.

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The Stops in OmniTrader

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Protective and Profit Stops
We can generally divide
the stops in OmniTrader
into two categories:
Protective Stops and Profit
Stops. The combination of
these two types of stops
Profit Stop
will help us in creating a
Trade Plan.

Protective Stops are used Protective Stop

to minimize our losses.

Profit Stops are used to A Fixed Loss Stop (Protective)

maximize gains as well as and an Eighth’s Stop (Profit)
protect profits.

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 Stops in OmniTrader

PROFIT STOPS PROTECTIVE STOPS

Eighths Tool Break Even
Fixed Profit Fixed Loss
Trailing Pivot Fixed Loss Pivot
Trailing Profit
2 Moving Avgs TECHNICAL EXITS
Moving Avg Crossover Inactivity
Relative Minimum Stop* N-Bar Exit
Reversing Signals
Technical Exits don’t really fall Session Boundary Exit
into either category, but can used
to help refine a Trade Plan or test (for Real Time Only)
signal accuracy. Next Pivot Point
*Nirvana Club Only

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Loss Stops

Fixed Loss Stops

Fixed Loss Pivot Point: A stop Fixed Loss Stop: A stop is signaled
is signaled when price crosses the when price crosses a predefined level
previous loss side pivot point and to the loss side. (EX: 2 ATR’s)
a cushion. (EX: 1 ATR)

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Profit Stops

Moving Average Based Stops

Moving Average Crossover: Two Moving Average Crossover:

This stop will exit a trade when This stop will exit a trade when price
price crosses a simple moving crosses a the short SMA and the long
average. (EX: 50 period SMA) SMA is either flat or against the
trade. (EX: 21 & 70 period SMA’s)

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More Profit Stops

Trailing Stops

Eighth’s Stop: Once price closes Trailing Profit Stop: Once price
above an eighth’s level (long crosses a threshold, a trailing stop is
trade), the stop is moved to the activated that follows price by a
next higher eighth’s level. (EX: 2 certain amount. (EX: 2 ATR’s)
ATR’s)

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More Profit Stops

More Trailing Stops

Trailing Pivot Stops: Signals an Relative Minimum Stop*: A stop

exit when price moves through the is placed at the low (long trade) over
previous lower pivot (long trade) N bars. (EX: 5 Bars)
and a cushion. (EX: 1 ATR’s)
*Nirvana Club Only

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Comparison of Stops

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OmniTrader’s Stops
With all of the available stops, it can be confusing to know which ones to
use in your Trade Plan. And even after we have selected a particular stop,
we still have to know which parameters we will use to tune that stop to
our trading style.

To try and help you understand the stops in OmniTrader and decide which
ones best suit your trading style, let’s look at a comparison of the stops.
We’ll also take a look at the effect of changing parameters on stops.

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Creating a Stop Test Bed
For our comparison, we created a new profile and we will use the stocks
that comprise the S&P 100 index. We will use a back test period of 250
bars, and we will use the Default Strategy for signal generation.

The default strategy uses a Fixed Loss Stop (Protective Stop) and a
Trailing Profit Stop (Profit Stop). Here are the results when run the
strategy using the default settings.

We’ll use these results to help understand the

effect of changing stops and stop parameters.

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Stop Selection and Settings

The stops are contained in the strategy’s Orders Block. The parameters
for each stop can be viewed and/or edited by highlighting the stop.

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Comparing Loss Stops
We have already generated statistics to show the strategy results if we
use the Fixed Loss Stop (3 ATR’s) as the Protective Stop. Let’s change this
to OmniTrader’s other Protective Stop, the Fixed Loss Pivot Stop, and
compare the results.

Fixed Loss Stop Fixed Loss Pivot Stop

The results are very similar for the most part, although we did see an
increase in APR of 7% using the Fixed Loss Pivot Stop. Another difference
worth noting is the Bars in Trade (ABT) decreasing when we applied the
new loss stop. Let’s look at some chart comparisons to get a better idea
of how well these protective stops work.

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Comparing Loss Stops
This chart for DELL shows how much tighter the Fixed Loss Stop is
compared to the Fixed Loss Pivot Stop.

Fixed Loss Stop Fixed Loss Pivot Stop

CONCLUSION: For most traders, the Fixed Loss Stop is a more effective
method of protecting equity than the Fixed Loss Pivot Stop.

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Changing Loss Stop Values
The Fixed Loss Stop uses ATR calculations in order to determine its level.
The default value is 3 ATR’s, but we can change this value in order to see
the effect of tightening or loosening our stop. Here is a comparison if we
use 2 ATRs for the calculation value in order to tighten the stop.

Fixed Loss Stop (3 ATR’s) Fixed Loss Stop (2 ATR’s)

While the statistics are very similar, it looks like the 2 ATR value has
decreased hit rate bur raised profitability slightly. Let’s look at the
comparison on a chart for a better understanding of the effect of this
change.

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Changing Loss Stop Values
The chart for MDT shows the effect of the tighter loss stop. We are taken
out of trades sooner, thus protecting our equity. But there are times when
the looser stop will allow the trade mature into a profitable one. This
illustrates the balance every trade must find in stop placement in order to
maximize the results of their Trade Plan.
Fixed Loss Stop (3 ATR’s) Fixed Loss Stop (2 ATR’s)

38
Increasing Loss Stop Values

So what it we loosen the stop? We changed the Fixed Loss Stop value to
4 ATR’s and ran it on our symbol list. Here are the results.

Fixed Loss Stop (3 ATR’s) Fixed Loss Stop (4 ATR’s)

We now can begin to understand the inverse effect of hit rate to

profitability when we adjust a our Protective Stop. As we loosen our stop,
our hit rate will increase as we give the trade more room to mature. But
we are also increasing our risk and exposure at the same time.

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Percent/Points vs. ATR’s

We can also choose to have our stop values use either percent or point
values for their calculation as opposed to using ATR’s. Let’s look at an
example of using 5% from the entry bars close price for our Fixed Loss
Stop calculation.

Fixed Loss Stop (3 ATR’s) Fixed Loss Stop (5%)

The numbers show a decrease in accuracy, but an increase in profitability.

Based on our previous findings, we could assume that this means it is a
tighter stop. But that is not always the case when we use percent or
points for calculations. Let’s look a couple of charts to illustrate.

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Percent/Points vs. ATR’s

Due to the difference in price values across a universe of stocks, a

percent or point based stop calculation can be either tight or loose.

Fixed Loss Stop (5%) Fixed Loss Stop (5%)

Because of this effect, we use ATR calculations in all OmniTrader

strategies so that the exits adjust better to different securities.

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Comparing Profit Stops

Now that we’ve looked at using Protective Stops to protect equity, we can
look at the various Profit Stops that can be used to protect profits. The
Default Strategy uses a Trailing Profit Stop of 3 ATR’s. For our first
comparison, let’s look at the performance difference between this stop
and an Eighth’s Stop (1.5 ATR’s).

Trailing Profit Stop (2 ATR’s) Eighth’s Stop (1.5 ATR’s)

We see lower accuracy but higher profitability using the Eighth’s Stop.
Let’s look at a chart comparison to see why this would be the case.

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Trailing Profit vs. Eighth’s

Since the Trailing Profit Stop is tighter, it will exit trades more quickly that
the Eighth’s Stop. The tighter profit stop means that we will usually have a
higher accuracy of trades, but lower profit per trade.

Trailing Profit Stop (2 ATR’s) Eighth’s Stop (1.5 ATR’s)

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Trailing Profit vs. MA Crossover

Our next comparison is to look at a Trailing Profit Stop

compared to a Moving Average Crossover (50). Here are the
results:
Trailing Profit Stop (2 ATR’s) Moving Average Crossover (50)

These results show an increase in every category except Bars per Trade.
The numbers seem to indicate that this would be a better profit stop
method. Let’s compare the methods on a chart for further examination.

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Trailing Profit vs. MA Crossover

The chart shows two potential problems with the MA Crossover Stop:
signals that occur in a consolidation are prone to being stopped out early,
and also there are times when we may be allowing too much room
between price and the exit to effectively protect profits.
Trailing Profit Stop (2 ATR’s) Moving Average Crossover (50)

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Trailing Profit vs. Two MA Crossover
Another form of moving average stop method is the Two Moving Average
Crossover Stop. The statistics generated for our comparison purposes are
listed below.

Trailing Profit Stop (2 ATR’s) Two Moving Average Crossover (70, 21)

We see a slight decrease in accuracy and a slight increase in profitability.

Again, this normally indicates a looser stop. Let’s look at a chart for
additional comparison.

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Trailing Profit vs. Two MA Crossover
The difference in profit protection methods is clear on this chart for LEH.
Both methods are effective in trending markets, although the Two Moving
Average Crossover Stop allows more room to catch extended trends.

Trailing Profit Stop (2 ATR’s) Two Moving Average Crossover (70, 21)

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Trailing Profit vs. Fixed Profit
Our next comparison is to look at a Trailing Profit Stop
compared to a Fixed Profit Stop. Here are the results:

Trailing Profit Stop (2 ATR’s) Fixed Profit Stop (3 ATR’s)

These results show an increase in every category except Bars per Trade.
By exiting trades more quickly, the strategy is able to fire more signals
and increase the Profit Per Symbol. Once again, let’s investigate further
by looking at the methods on a chart.

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Trailing Profit vs. Fixed Profit

Here we see the same signals fired, but using a Fixed Profit
Stop leads to much shorter term trades.

Trailing Profit Stop (2 ATR’s) Fixed Profit Stop (3 ATR’s)

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Which Method Should I Use?
The components that you will want to use to make a Trade
Plan depend on various factors including risk tolerance,
account size, desired trade term, etc. But here are some
general guideline you can use to help your decision process:
1. PROTECT YOUR EQUITY: Always have a Protective Stop in place. While
other factors will determine your plans effectiveness, this is the single
most important aspect of trading successfully.
2. The shorter the trade term, the tighter the stop.
3. Focus on profits. Accuracy is not the goal - it is only a tool to help us reach
our goal.
4. Be willing to trade the Trade Plan. While very loose stops may lead to
higher statistics, you should always view the Trade Plan from the
perspective of whether you are comfortable trading it.
5. Practice with your Trade Plan. Game Mode and Lab Mode provide you
with the ability to practice with a Trade Plan before putting your money on
the line.

50
Using OmniTrader’s Stops
The stops in OmniTrader were initially designed to test systems and
strategies. They provide us with the tools to approximate a Trade
Plan.
Yet fixed, non-adaptive exits suffer from the same weaknesses that
are inherent in fixed, non-adaptive systems.
Let’s look at various options we could use to help protect our equity
and profits while trying to maximize our gains.

51
Multiple Trailing Profit Stops
One method we could use to better protect our profits while
attempting to maximize our gains is to use multiple trailing profit
stops at different times during a trade.

Initial Profit Target

Trailing Stop Automatically
Adjusts to become tighter.

Here we see an illustration of this method. Initially, we are using a looser trailing profit
stop to allow the trade some wiggle room to get going. Once we have realized a
predetermined amount of profit, our trailing profit stop automatically becomes tighter
in order to protect our profits.

52
Automatic Adjusting of Methods
This method is similar to the previous method, but instead of
changing the parameters of a particular stop, we are going to change
from one stop method to another if a desired condition is met.

Moving Average Stop

Relative Minimum Stop

In this illustration, we start our trade with a moving average crossover stop. By defining
a condition that recognizes an explosive upward move, we could have our Trade Plan
automatically adjust the type of stop used to a Relative Minimum Stop in order to
tighten up our stop and protect our profits.

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Partial Exit Method
Pattern Sell ½
• Partial exits improve
our odds of success PE
by reducing losses in
the early stage of our Entry A?
trades.
• By taking an initial
profit on part of our B?
position and then
leaving the rest of the
position open, we are
in effect reducing our
risk by minimizing our Initial Stop Loss Sell ½
potential loss, and
hopefully maximizing
our potential gain by In either scenario A or B in this illustration, risk
letting the rest of the has been reduced by taking a profit on a partial
trade run. exit.

54
 Partial Exit Examples
Scenario 1 – Reducing Risk
A long trade hits our Partial Exit Target.
We exit half of the position, and the
other half then turns against us. 3 Options You Have Using Partial Exits
Options
1. Do Not Move Loss Stop
If we choose this option, we have still reduced our
potential loss since we took profit on half the Partial Exit
position.
2. Adjust Loss Stop Up
By moving our stop up to the initial entry level, we
could guarantee a break even result on the Loss Stop 3
remaining half of the position and still profit on the
overall trade.
3. Adjust Loss Stop Down Loss Stop 1
We could choose this method if we wanted to give
the rest of our trade more room to move before
hopefully hitting a trend. We could double the
distance of the initial loss stop without increasing Loss Stop 2
our initial potential loss.

55
 Partial Exit Examples
Scenario 2 – Letting Profits Run
A long trade hits our Partial Exit Target.
We exit half of the position, and the
other half continues to run in our favor.
Options
1. LET IT RUN!
Earlier we discussed the fact that the big
money is in the big moves. This exit
technique is meant to keep us in the market
without being overly exposed.
Partial Exit
We could use the chart, indicators, systems,
or other methods to manage the remainder
of the trade. A trailing stop would seem to be
the best choice as it will give the trade as
much room as possible to run and still
protect our profits.

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Summary
• Money Management is the most important
aspect of trading.
• By protecting your equity and protecting your
profits, you will be able to stay in the game
to catch the big moves
• Potential losses are the only aspect of
trading you have control over.
• There is an important balance we want to
reach between protecting our profits and
allowing our winners to continue to run.
• A Trade Plan incorporates all of these factors
into a method of trade management.
• OmniTrader’s stops help us test systems but
they can currently only approximate a
successful Trade Plan. It’s important to apply
your own trade management rules in your
trading.

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 Money Management
The Key to Trading Success

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