One of the oldest and most powerful money management strategies used to enter into and exit out of trades is using new highs and new lows over a certain period of time.
An example would be to buy a new 10-day high to enter into a trade in an uptrend and use a new 10-day low as your trailing protective stop. This allows one to trade on the daily chart without having to follow the market throughout day. To set your trailing stop, you just have to check the daily chart after the 5PM Eastern close to see what the lowest low of the 10 previous days was. If it was different from the previous day’s stop level, you just move your stop, if not, you leave it alone. You can do this until the market comes back up to stop you out, meaning you are trying to get the most out of the move or you can set a limit order based on twice your initial risk for a 1:2 risk:reward ratio. The key is to only trade in the direction of the trend as that is where you will find some of the biggest moves. The 10-day recommendation is only that….a recommendation. Some of the most successful traders have used values from as little as a new 3-day high or low to as much as a new 55-day high or low to enter into or exit out of a trade. You can also use this approach on an intraday chart, although I would recommend using higher values. Perhaps a 20-period high or low on the 4-hour or even a 24-period high or low on the hourly chart would be more appropriate than a 10-period high or low. You have to check to make sure. But it is easy to backtest this approach as it is easy to identify new highs and lows….either they are or they aren’t. The key to trading on the intraday charts is once again to only trade in the direction of the daily trend. While this money management approach may not be perfect, it is better than most money management strategies used in the markets and is relatively easy to use. That makes it a valuable tool worth looking into by traders who currently struggle with how to get into and out of a trade.
Written by Dailyfx.com
