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Managing Futures Trades: Considering Scenarios in the Australian Dollar

There is the "set and forget" approach to trading, where once a trade is a taken it is allowed to run its course, hitting the established stop loss or profit target.

Active management is a more advanced form of trading, where consideration is given to scenarios which could develop while the trade is underway. The trader strategizes how they will react to each scenario. Since price movement is revealing new information all the time, this approach, in practiced hands, leads to better performance than the set and forget method.

A current example is Australian Dollar futures (6A). Figure 1 shows a downtrend on the 4-hour chart.

Figure 1. Australian Dollar Futures - 4 Hour Chart

Between March 11 and March 23 the price rallied off the 0.7517 low, toward the 0.7905 February high (pink horizontal line) and then stalled in that area for two sessions. With the trend down, the price having just failed to break through resistance, and now moving lower again, a short trade was taken.

An initial stop loss is placed above the short entry point, but now active management takes over.

  • The trend is down overall, but since the start of February the price has taken on a more ranging sideways movement. This puts the desired target near the bottom of that ranging movement (grey box). If the price continues to fall slowly, exit at 0.76. If the price is falling sharply, hold the trade but exit within the box as soon as there is any sign of a reversal (price stalls, bullish engulfing pattern, etc)
  • The price is currently falling off the March high, but if that decline stalls out and reverses anywhere above about 0.755, there is a potential inverse head and shoulders forming. This is a bullish pattern (if it completes, which is unknown at this point).  As indicated above, if the price stalls out in our target area, exit the trade. The same goes for above our target area. Because of the potential bullish pattern forming, if the price stalls at 0.7600 (just an example) and then starts to rally again, exit the short and consider going long (a potential "snap-back" trade).
  • With the short trade producing a profit so far, under no scenario (in this particular case) is it allowed to turn into a loss.
  • If a long trade is taken, go through the same process. The 0.79 area is resistance and a possible exit area. But if the price is moving strongly toward the level, hold the trade to see if it breaks. Also consider scenarios for if the trade doesn't move as anticipated.

Not every scenario needs to be planned. For example, a decision is made to exit the short trade before the bottom of the grey box area. Therefore, no plan is needed (on this particular trade) for if the price falls below the grey box.

This trading approach takes lots of practice, but is highly effective for traders who have the discipline to plan ahead for multiple scenarios playing out.

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