A question comes in from a worried Trader’s Nest reader…
“I’ve got this trade that’s well in profit. My usual strategy is to trail the stop loss so I can lock in some of the profits and then give the trade a chance to turn into a long-term one. But what do you think I should do ahead of the weekend now? Should I keep the trade open or take some early profits?”
Now there are 3 ways I think you can handle situations like this. And you can use them all under different circumstances.
But there are definitely risks involved when you hold trades over the weekend.
This is perfectly demonstrated from time-to-time when traders lose the shirts off their back. It happens when they go into Friday night holding big positions (relative to their account) on tight stop losses.
Here’s how it can all go wrong for them…
When the brokers are closed for the weekend from late Friday evening, trading sentiment can still change in a big way, even while the markets are closed and ‘untradeable’.
Kneejerk reactions in market price can impact any of your open trades but traders can do little to actively manage their trades until the brokers open again on Sunday night.
It can make for a bit of a restless weekend if you get caught out holding a position in circumstances like this, let me tell you!
Now here’s that question from my reader again…
“But what do you think I should do ahead of the weekend now? Should I keep the trade open or take some early profits?”
So, this trader was in a situation where good profits were already there on paper – he could close the trade now and walk away with the loot – but this wasn’t his normal modus operandi. He likes to try and let his trades carry on running wherever possible and let the market take him out when it finally triggers his trailing stop loss.
But like I mentioned above, the risk is that market sentiment can actually move while the broker is closed for the weekend. You see this reflected on the chart with a ‘gap open’. It’s where there’s a gaping hole between the close on Friday evening and the open on Sunday night.
And the new opening price can actually gap-over any stop loss orders or take profit orders that you had resting in the market!
Here’s a nasty looking gap. Imagine how unexpected losses caused by the market gapping-over the trader’s stop loss might have caused him a bit of a panic when the markets sprang back to life on Sunday night!
Now with a view to building a systematic and methodical approach to trading I think it’s a good idea to design an approach that becomes the accepted ‘norm’.
For this trader I think it would be best if he decides on a course of action that he can apply every Friday, whether there is any known geopolitical stuff in the pipeline at that time or not.
This way he’ll always know exactly what to do in terms of pre-weekend housekeeping.
It leaves nothing down to a decision made in the heat of the moment.
It always comes down to personal preference of course. There’s no single ‘right way’ to prepare for the weekend just as there’s no single ‘right way’ to find entry points for your trades.
But let’s look at the 3 main options you have when Friday night looms and you still have trades running…
Here are 3 ways to handle pre-weekend trade management
1) Tighten stops and do nothing special. This is the default setting. All we’re doing here is applying the normal trading strategy: tighten the stop loss to lock in early profit at the appropriate time and leave the trade to run as normal.
Yes, the risk is that an occasional gap open might skew the odd result… now and then you’ll get a trade that shows a slightly bigger loss or less profits than you anticipated because of a gap open. You might even get trades that gap past your original target price so you actually get filled with greater profits than expected!
But with a good money management and position sizing policy in place no single trade should ever have the opportunity to make too much of an unexpected dent on your account. In fact, a small amount of ‘slippage’ on your entry and exit prices should be priced-in over the course of a series of trades as part of your ‘real world’ expectations anyway.
So that’s option 1: do nothing special ahead of the weekend and accept the odd skewed result as part of your long-term campaign.
Here’s option 2…
2) Close all open trades before the close on Friday. This is the kind of approach I’d recommend for shorter term traders. It provides security against gap opens and it gives you peace of mind that nothing terrible can happen to your positions while the market is closed, so you can at least enjoy a relaxing and stress-free weekend!
But remember, we’re looking for ways to stay in trades for the long term here. So how can we achieve that when we close out the trades each Friday?
One tactic you might use is to close all your open positions at a set time each Friday – I like to use 7pm – and then reopen the position at a set time on Sunday night or Monday morning.
Yes, there’s going to be a difference in price when comparing your exit on Friday and re-entry on Sunday – sometimes it’ll cost you and sometimes you’ll gain – but you might consider that a small payoff against security and peace of mind over the weekend.
There’s one downside to this approach, and it’s a bit psychological in nature… it can be tough to re-enter a trade that has already made a profitable 50 or 60 pip move without you being on board!
Luckily, there’s a third way we can prepare for the weekend. A kind of ‘halfway house’ that gives some security and still keeps you involved and committed to your trade.
3) Hedge your bets. Take half the position off on Friday night and re-enter the other half on Sunday: it reduces your exposure to an adverse move over the weekend but maintains your presence in the market. And it can be mentally much easier to amend and adjust an open position than to completely re-enter 100%.
And the beauty of this approach is that you can scale the slice of the position held over the weekend to suit your own tolerance to risk… you might only hold onto 30% of the overall trade, or even 10%.
But I’d certainly think about keeping a part of the original trade live however small. It can really help maintain that connection to your original plan and overcome any mental reluctance to jump back in on Sunday night.