How To Maximize Returns While Keeping Risk At Bay

No matter what you do, minimizing your risk and covering your ass(ets) should always be your first priority in anything you do related to trading. I never think about how much I stand to make when I first look at a trade idea, I always look at the risks first and search for reasons NOT to take the trade.

However, that doesn’t mean that I don’t want to make money. Whenever I am in a trade, I first look to reduce my risk, and then I look at how to maximize returns – there are three ways in which to maximize returns on a single trade: either, you pull your Take Profit order to a galaxy far, far away… or you risk a huge chunk of your bankroll… or you find means of entering multiple times while never risking more than the initial amount. Yes, pyramiding a trend is the ultimate answer for me when it comes to maximizing returns. But I neither like top-heavy nor bottom-heavy pyramids.

Top-heavy pyramids tend to cost you a lot of money when a trend ends, as more and more percentage of your bankroll is actually invested into the trade and quite a few of your orders are stacked at the top of the trend. When you exit, usually 20% or even more of the initially accrued equity will go down the drain when the exit signal comes around. Vice versa, a bottom-heavy pyramid defeats the purpose of pyramiding when the heavy initial position, to start building your pyramid, will often result in a loss and when you finally hit a trend and can start pyramiding, the smaller positions on top often cannot make up for the losses when trying to establish your pyramid.

The technique I use is useful for trend traders as well as reversal traders, but probably not for scalpers (never heard of a scaling-in scalper).  It’s simple and efficient, so let’s take a look.

First, I find an entry, obviously. I assess my exit points in profit or loss, and assign a risk to the trade depending on its’ quality, and off we go. My initial target can never be less than 2:1, better 3:1 or higher, as this allows me to have room for managing my trade, get it to breakeven, and squeeze in another few trades before the target is reached.

There are three ingredients to my pyramiding:

1. Whenever opening a second trade, the stop loss of the first trade moves to the stop loss of the second trade, and this stop loss has got to be at least break-even for the first trade. When we open a third trade, the stop loss of the first and second trade move to the stop loss of the third trade, and so on. This ensures that we never risk more than our initial amount on the whole trade.
2. I have several entry techniques on the timeframe I took the trade on to ensure I can make the most out of the run before reaching my target.
3. Once I entered on timeframe (x), I also move down to a lower timeframe to look for entries, as the entry on the higher timeframe grants me momentum which I can exploit with mechanical trend following strategies on a lower timeframe.

Oftentimes, my first entry will have a RRR of 1:8 or higher, my second entry then a RRR of 1:6, and so on, as all trades target the same level. A successful run, where all the trades keep going until the target, happens around one time per month, and usually, these runs grant me 15R or more, which is plenty for a month’s work. The other runs usually come in at much smaller returns, a few R gained here and a few R lost there, while there is a slight upwards tendency with these “failed” runs and the volatility on my account is at a minimum. Let’s take a look at a run I recently took and remember: while the entry points I choose for my trades are an important point of my strategy, you can apply this money management technique to your own strategy just as well.

1) I draw S&R on the weekly timeframe. Each Sunday, I check all my charts for the weekly candle that was created last week and update my S&R levels if need be.

2) I look for price action on the daily and 4 hour timeframes around these SR levels (candlestick patterns, higher highs/higher lows, formations like Head & Shoulders, etc.).

3) I always go with the trend. If a PA signal occurs versus the trend, I wait for higher highs/lower lows to form for confirmation of a new trend.

4) I always target the next SR level.

5) And then I try to stack as many orders as logically possible. All additional orders that follow after the initial trigger have to have at least a RRR of 1:1. Stop losses typically are placed behind the last swing high/low or the price action bar.

Here are two examples on the same chart.

As you can see, fairly simple entries with the trend, in each case I could stack only one additional order on the 4H timeframe as the SR’s were quite close together, however, the principle becomes clear. Also, notice the H&S formation indicated by the yellow circles. On the second trade, however, I was able to squeeze in two additional bullets via my H1 entry strategy. Here it is.

As you can see, I was able to squeeze additional 5R out of a trade which should have been a 2:1R trade initially, eventually netting me 8.5R. At one point, which I marked with the yellow square, I was 5 pips close to being taken out with only 0.5R although I had already been up more than 3R, but 4 hours later I was quite a bit richer. Looking at your P&L during these runs is devastating and can absolutely burn you. Once I have my plan laid out, I do NEVER deviate from it. I don’t move my SR and/or exits around and I mechanically follow my trend entries, trail my stops, and let the market do its’ thing.

Of course, I also have rules for premature exits, e.g. before the weekend, surprise news items, price action that goes against me in an obvious way, and so on. But those are rules and I follow them to the tick.

I hope I could clarify a bit how I manage my risk. I have 5 entries in my trading plan, all of which I use to stack up orders until my take profit is hit or I get taken out. Vital with this strategy is that you leave your trades room to breathe, as momentum is on your side, and you have to trust your read on the market. You get in with the trend, you get in with the right timing, now just don’t keep your stops too tight, eliminate your risk whenever logical, and add as many positions as sanely possible. You only need one runner per month to be a happy camper.