All trading strategies give an answer to the question of when to open and when to close a trade. However, the vast majority of strategies practically do not answer the question of managing an open position effectively. Although it can increase profitability to a great extent.
At the moment, there are three most common ways to manage an open position.
1. Stop Loss and Take Profit
The rules of classical trading in the foreign exchange market imply to keep two orders that will close an open position without the participation of a trader. Stop loss closes the trade in loss while take profit closes the trade in profit. The first method is based on using these two orders:
- We set the stop loss order at the support/resistance level, and ignore the placement of the take profit order. As a result, the potential loss is strictly limited, while the potential profit is not. This option is often used by experienced traders who constantly monitor the dynamics of an open position.
- We do the opposite; take profit is set, but stop loss is not. The absence of a stop loss allows a trader not to accept a loss on a deposit, but to use the stop loss to protect the profit only. Such a “maneuver” is very risky and can result in a major loss. To use it, you must have extensive practical experience and understanding of the factors influencing the price and market mechanisms.
2. Using Trailing Stop
Trailing stop is a function built into the MetaTrader 4. It allows you to set a certain number of pips, that if achieved in a position, the stop loss will automatically be placed at breakeven and then as the position will keep moving in the profit, the stop loss will keep trailing too. Even if the price reverses and the trade closes with stop loss, the trader will still end up in profit.
A significant drawback of the trailing stop is that it can only work when the trading terminal is running, therefore a VPS server is required for its constant use.
3. Hedging Positions
This option is widely used in the foreign exchange market by hedge funds to reduce trading risks, but it is also used by retail traders.
In general terms, the meaning of a hedge is to open two multi-directional transactions for the same instrument.
There are many options for hedging, and some of them allow you to divide a trading deposit with virtually no risk, getting to increase profits several times. This is done due to a significant increase in the volume of the second opened transaction, while the stop loss at both positions are calculated and set in both positions.
It’s very disappointing to see the growing profit on an open position that later closes with a much lower profit. That is why, managing open positions, along with the calculation of entry and exit points from the markets is really significant for the traders. Of course, there are many more ways to manage open positions, like, partial closing of a position and so on.