Happy Friday!
This week’s question comes from Denise, who asks:
One thing I’ve always struggled with is being able to hold my winning trades longer. What can I do to increase my hold time when a trade is working in my favor?
Every trader dreams of catching “the big one”. That one trade that runs for more than 1,000 pips and produces 10R or greater.
As George Soros famously said, “it’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong”.
In other words, your winners have to pay for your losers.
Since 2010, that has been my credo. I always strive to ensure the potential reward from a given trade setup outweighs the risk by a minimum ratio of three to one.
But catching a 1,000 pip move is easier said than done. Not because currency pairs don’t move that far very often, but because it’s mentally and emotionally challenging. One could say that we are often our own worst enemies.
While I can’t guarantee that you will catch the next big move, I can share three methods that have helped me to hold winning trades longer. Think of this as part of your pre-trade checklist.
As simple as these may seem, I bet there’s at least one you haven’t thought of yet.
Read on to learn three simple yet effective ways to hold winning trades longer.
1. Set a Realistic Holding Period
How long will it take the market to move from point A to point B?
That’s the question we need to answer. Of course, this assumes the market is going to move in our intended direction.
One of the most common mistakes I see traders make is that they don’t set realistic holding periods. They go long the EURUSD with a target that’s 600 pips away, yet they get anxious when the target hasn’t been reached in a couple of days.
On average, the EURUSD might move 70 or 80 pips in a 24-hour period. And when you factor in the counter-trend moves, it will likely take weeks if not months for the market to move 600 pips in any one direction.
Luckily, there’s an incredibly simple way to figure out how long it might take the EURUSD to cover 600 pips.
Just like we use past price action to identify key levels, we can also use it to determine a realistic holding period.
Take the chart below as an example.
All I’ve done is measured two recent bull moves. The first ran for 700 pips and lasted for 48 trading days. The second ran for 530 pips and lasted for 39 trading days.
So, if you are preparing to buy the EURUSD at a new support level and have a 600 pip target, you should probably aim for a holding period somewhere between 40 and 50 trading days.
Surprisingly simple, right?
Of course, this is a somewhat hypothetical example as each instance will vary, but it’s a good starting point.
The problem arises when a trader sets a 600 pip target and then starts to get anxious after a week or two. As you can see from the two moves above, a 600 pip move can take two months or longer to play out.
Just remember that it’s better to anticipate a longer duration and be surprised than to establish a shorter holding period and get anxious.
2. Manage Volatility Expectations
Markets don’t move in a straight line. Sure, there will be periods where it seems like the market has a one-track mind, but a return to volatility is never far away.
Let me ask you something…
Do you ever find yourself staring at the unrealized gains from an open position?
If you’re anything like I was when I first started trading, the answer is a resounding yes!
I couldn’t help but watch the dollar amount fluctuate. But if I’m honest, it was fun to watch as long as those unrealized profits were increasing.
As soon as it started to drop, well, it wasn’t so fun anymore.
Therein lies the problem. You see, as long as you’re staring at the open profit in your account, you’re vulnerable to becoming emotionally involved in the trade.
That’s the opposite of what we want. As I’ve stated in the past, unrealized gains belong to the market.
But let’s take it one step further and attack the root of the problem.
The source of that emotional involvement isn’t so much the fluctuation of those unrealized gains, it’s a lack of preparation.
If you understand before you ever get into the trade that the market could move 100 or 200 pips against you, what is there to worry about?
The answer is nothing. When you anticipate those type of moves against your position, there’s nothing to worry about when it actually happens.
Of course, the problem is that most traders don’t properly manage their expectations, such as accounting for volatility, before putting on a position. They identify the setup, set their take profit and stop loss orders and that’s it.
However, because money is involved, the moment the market challenges your idea, it’s all too easy to pull the plug and walk away.
To ease the pain of getting out early you tell yourself things like “hey, at least I made a profit”.
But every good trader knows that it isn’t about just making a profit. It’s about ensuring that you make enough on your profitable trades to pay for the unprofitable ones.
You can’t do that if you’re getting out at the first sign of adversity.
Just like the method for setting your expected holding period, there’s a simple way to figure out how much volatility to expect.
Remember those two bull moves on the EURUSD? Here they are again:
Notice how there were substantial counter-trend moves in both situations. There was a 175 pip pullback during the first 700 pip bull move and a 245 pip pullback during the second 530 pip move.
So, if you’re about to buy the EURUSD you should expect to endure similar types of moves. Remember, it’s all about setting proper expectations before risking capital.
One last thing. Always be sure to check the event calendar before placing a trade. If your expected holding period is three weeks, you should check the calendar for the next three weeks.
You don’t need to plan for every single event, but you should have a good idea of how much volatility to expect over the next three weeks as well as when to expect it.
3. Lower Your Risk Per Trade
This final method is the easiest to implement. It’s also going to help boost the longevity of your trading career.
Using too much risk or leverage is a big problem among traders. The limitless environment and incredible leverage offered by many Forex brokers make it all too tempting to risk 10% or 20% of your account on a single trade.
But here’s the thing…
If you want the ability to hold winning trades for longer, you need to lower your risk.
The only way to have peace of mind while holding a position for weeks is to know that a loss won’t break the bank. That isn’t possible if you’re risking 20% of your account balance on a trade.
If you do, every tick against your position will feel like torture. Plus you’re far more likely to get out too soon if you are risking an amount you aren’t comfortable losing.
So how much should you risk?
Only you can answer that. However, I would argue that if your risk is greater than 3% of your account balance, it’s going to be much more difficult to hold winning trades for days or weeks at a time.
Personally, I keep my risk to about 1% of my account balance. It was 2% just about a year ago, but I’ve since dialed it back even further.
Nothing says I can’t scale into the position once the market begins to move in my favor. In fact, I almost always do that, provided the risk to reward ratio and key levels on the chart allow for it.
Be sure to use the position size calculator before every trade. It will help keep you in the game longer and allow you to ride winning trades by risking an amount you’re comfortable losing.
Final Words
Regardless of your trading experience, the three methods given above will help you hold winning trades longer. This is especially useful because as they say, your winners must pay for your losers.
A realistic holding period is a must if you intend to hold trades longer than a day or two. If your target is 600 pips away, it’s illogical to assume the market will reach the target in a matter of days, or even a week.
It’s better to expect a longer holding period and be surprised than to have one that is incongruent with recent price action.
No market moves in a straight line, so be sure to take volatility into account when planning a trade. If the market tends to swing 200 pips against the trend, you should be prepared for such moves while holding the position.
When it comes to market volatility, another critical step is to check the event calendar before you enter. If your holding period for a EURUSD short is three weeks and there’s an ECB rate decision in a week, expect an increase in volatility.
Last but not least, if you want to hold a winning trade for weeks or even months, you should think about lowering your risk. Using a position size that is too large for the account is one of the primary reason traders panic when volatility strikes.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
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