Quite simply, successful trading involves executing trades at the best key levels using sound trade management that allows you to eliminate your risk in the position as soon as possible, while giving yourself the flexibility to capture larger profits.
As we move forward, I’ll give you my preferred approach to managing trades in any timeframe, whether you’re a scalper or investor.
But first, we’ve got to talk about homework.
Homework: Identifying the RIGHT Key Levels and Targets
Much of trading comes down to identifying the best key levels. Where is value? Which prices is the market paying attention to, and why? Where are market participants positioned around these prices? Where is the market trying to go, and how good of a job is it doing at its goal? These are all questions we should ask ourselves as we analyze the market.
I provide analysis to our Premium Members daily, which makes your homework easier as you’re looking for trade opportunities.
Here’s the analysis that I provided Premium Members Wednesday afternoon for the E-Mini NASDAQ 100 futures contract just after the market closed, wherein I make this $4000 money-making trade recommendation:
“The NQ rallied through the previous week’s high price of 4608.75, but eventually sold off to close back below this level, suggesting failed range expansion may have occurred. Look for bears to defend a retest of 4608.75 for a move into 4532 and 4496.50.”
Per my analysis, the RIGHT key level to watch and trade was the previous week’s high price of 4608.75. My analysis of what happened around this level was simple: The NQ failed to find acceptance above 4608.75 during Wednesday’s market, which suggested failed range expansion and a likely return to the previous week’s low price of 4496.50.
This is nothing revolutionary, it’s just standard auction market theory and foundational technical analysis concepts. I like to believe that I do a great job at not only identifying the best key levels in the market, but in also relaying the WHYs behind my reasoning, which helps train our Premium Members along the way.
Now that we have our trade idea locked in, let’s focus on the trade management and execution.
Trade Management: Using the 211 Scaling Technique to Create Low-Risk Positions
In my opinion, risk management is perhaps the most effective way to become a consistent trader. Professionals rely on trade management approaches that allow for scaling out of positions gradually, which helps to reduce, and ultimately eliminate, risk in a position.
Getting to breakeven is one of the most important risk management goals that every trader should strive for after executing an entry, as it helps program the trader to take quick gains to finance the risk of the trade, while simultaneously helping to improve the mental well-being of the trader.
I teach a variety of these techniques via PivotBoss Masters, and I’ve written about them before (like HERE).
For this article, I want to introduce you to the 211 Scaling Technique, which is a 3-part trade management technique that is designed to reduce your risk in a trade by scaling out of half of the position immediately upon reaching your first, pre-determined target, which is equidistant to the initial stop loss of the trade. Once the first scaling target has been reached and you’ve successfully scaled half of the position, keep the same stop loss in place for the last half of the trade, and you essentially have a completely “free trade”, less commissions.
The second and third legs of the position scale in 1/4 units, which are to be executed at your pre-determined targets. These additional scales give traders a ton of flexibility.
The 211 Scaling Technique is among my favorites, and can be applied to any timeframe for any instrument, whether you’re scalping the ES or investing in SPY.
Formulating the Plan: Visualizing a Successful Trade
Now that we have our preferred trade management technique, let’s formulate the plan for executing a successful trade for our E-Mini NQ example. First, we have to know what we’re willing to risk. Depending on the volatility of the market, I tend to risk somewhere between 3.50 and 5 points when trading the NQ. Let’s go with a 5-point stop for this example.
Remember, all we’re trying to do with this approach is get ourselves to breakeven as soon as possible, so that the remainder of the trade is free to reach its targets, while we preserve our mental capital and maintain a stress-free mindset.
- Trade Idea: Fade the 4608.75 wHI in NQ for a return to the wLO at 4496.50
- Entry: Submit a Limit Order to sell 4 contracts of NQU5 at 4608.75
- Stop Loss: Submit a Stop Order to buy 2 contracts of NQU5 at 4613.75
- If Stopped: Loses $400 if the stop is hit before the first scale
- Free Trade: Trade breaks even (loses $0, less commissions) if hit after first scale
- 1st Scale: Scale 1/2 the position at 4603.75 using a Limit Order to buy 2 contracts, which books a 5-point winner (+$200)
- Free Trade: Trade breaks even after reaching the first scale
- Keep original 5-point stop for next scales, but resubmit Stop Order to cover (buy) 4613.50 with just 2 contracts
- 2nd Scale: Cover 1/4 position at primary weekly bear target at 4532 using a Limit Order to buy 1 contract, which books a 76.75-point winner (+$1535)
- Keep original 5-point stop for final scale, but resubmit Stop Order to cover (buy) 4613.50 with just 1 contract. This is now a guaranteed profitable trade. NOTE: Stop can be further adjusted to lock in additional profit if desired.
- 3rd Scale: Cover last 1/4 position at final target of 4496.50 using a Limit Order to buy 1 contract, which books a winner of 112.25 points (+$2245)
- Risk Analysis: This trade risks $400 to make a potential return of $3,980, which is a 10:1 Reward:Risk ratio. Any ratio over 3:1 typically offers a great risk profile for a position.
Write a similar plan on a sheet of paper before you execute your next trade. As you do so, visualize yourself flawlessly executing your plan as the market easily moves in your favor toward each of your targets. Even better, visualize the trade just before bed and again in the morning when you wake up.
Remember, I gave this NQ analysis the afternoon before the market opened, so there’s plenty of time to prepare and visualize how you’re going to skillfully execute your trade.
Now, it’s all about execution.
Executing a Flawless Trade: Follow the Plan!
Now here’s the part that gets everyone, but in reality it should be the easiest part: Executing the plan. The hard work is done. We’ve identified amazing key levels and reliable targets. We’ve nailed down our trade management approach and have even devised a precise plan. Heck, we’ve even visualized the successful execution and completion of our trade…multiple times. All that’s left is to execute the orders.
But for some reason when it’s time to execute the plan, some traders succeed, while many others fail.
The easiest thing to do is just stick to the plan. Write out a trade ticket by hand if you have to, as I’ve been known to do to condition myself to stick to my pre-determined trading plans. Correct yourself if you stray from the plan. Discipline yourself if you continue to make mistakes. Oftentimes, I’ll use pushups to correct behavior, but choose whatever works for you.
Just stick to the plan. You’ll be amazed at what sticking to the plan will do for you.
Here’s how the trade turned out over two sessions using our 211 Scaling Technique, keeping in mind that slippage and commissions were not accounted for:
In all, this trade risked just $400 for mere minutes before all of the risk was removed from the position after the first scale was executed. This is the key! By scaling out of half the position early, you’re essentially removing your risk from the trade, which helps preserve your mental capital, keeping it stress-free and focused on the task at hand.
Universal Approach: So Everyone Can Play!
Don’t trade futures? Not a swing trader? Don’t use my platform? Not a problem!
Every technique that I’ve discussed in this article, from key weekly levels to failed range expansion concepts and scaling techniques, can be applied to ANY timeframe, ANY instrument, using ANY platform!
As a matter of fact, if you used my same NQ analysis from above and translated it to the PowerShares ETF QQQ (see inset), you would have rode a winner from 112.49 to 109.79 for a gain of $2.70 points – in just 2 days, and with minimal heat!
When I teach these concepts, I make sure to introduce concepts and techniques that can be used by most, if not all, traders. This also applies to my analysis and the proprietary tools that I develop.
Discipline is Key
As you can now see, the idea of executing flawless, low-risk trades is quite easy. The reality of actually executing a flawless trade, however, involves quite a bit more homework, rehearsal, and discipline.
Focus on executing a solid trade management approach, like my 211 Scaling Technique, and then begin developing the habit of sticking to your pre-determined plan. You’ll be amazed at the results.
Cheers!
Frank Ochoa
Author, Secrets of a Pivot Boss
PivotBoss | Own the Market
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