You probably know that proper risk management is essential to any successful strategy...
But here's where some traders lose their way:
Risk management should be strictly enforced from the moment a trade is opened, all the way to its final conclusion—without fail.
Too many traders focus entirely the money they might make, and get caught with their pants down when the Market has other ideas.
The truth is, you're not off the hook just because you entered a promising trade.
If you want to make money in the long term, you've got to manage your open positions and limit your risk every step of the way.
Fortunately, I'm about to show you how to simplify the entire process using my all-time favorite trading tool...
Risk Management Using Pitchforks
To draw a pitchfork, simply anchor three important swings or pivots on a chart.
The pitchfork lines, called median lines, will be projected at an angle into the future.
When drawn correctly, price will tend to follow a pitchfork's angled direction and interact with its median lines.
| | By simply connecting 3 major swings on a 4 hour chart, you can see how price interacted and respected that pitchfork's median lines.
Look at where that downward move came to an end, right at the lower blue median line.
This is just one example.
Drawing pitchforks on any chart and any time frame will show the same sort of interaction between price and median lines, therefore making it a useful tool to help set targets and trail stops.
Setting Targets and Trailing Stops
The proper way to draw a pitchfork (when managing targets and trailing stops) is to use important swings that will angle the median lines into the direction of your intended trade.
| | | | | | | | | On the chart above, I show the original entry right at the low of that correction with the original stop loss.
A great way to bank profits as your trade progresses is to take partial profit as price reaches your pitchfork's median lines, with your final target set at the upper blue median line.
(This is how I personally set targets when following the Exponential Profits System.)
Trailing your stop loss will be much easier if you follow my steps:
- Once your center median line has been reached, move your stop loss to break even, plus a few ticks in your favor. You could also take partial profit at the median line if you want.
- Once the middle section between the upper median line and center median line has been reached (blue dotted line), trail your stop upwards to behind the lower blue dotted lines.
- Once price breaks through the upper blue dotted lines and that high marked by the black line, you should be very close to your final target and you should aggressively trail your stop loss higher, to below the center median line.
If you follow this simple procedure, you'll allow the market enough room to move while hiding your trailing stops behind market geometry lines...
Thus limiting risk and scaling your profit potential until the moment the trade is closed.
Conclusion
What sets professional traders apart is the fact that they are excellent risk managers; they know how to keep their risk to a minimum while allowing their profits to scale continuously.
Remember: Trading is a business.
We should always approach the market with a plan.
Stay safe out there, we'll talk again soon.
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