profits or breakeven trades. This strategy should be used only in markets that are liquid and volatile. You want to make sure that the market partakes in wide swings throughout the day, as in the currency market or the S&P 500.

The basic premise of double and reverse is that when you are stopped out, you will double up on the opposite position to recoup your losses. With twice as many contracts, it will take half the initial move to get even. When even, you can reevaluate the current situation to make adjustments. Again this is a risky strategy, but if used correctly it can deliver great results. If you are wrong, however, this strategy could potentially double your losses. If you use it correctly, you can eliminate many potential losing trades or reduce the initial loss.

When your stop is hit, you are counting on the market continuing in that direction long enough to recoup the amount of your original loss, since you only need half the original move. Markets prone to false breakouts help this strategy, as well as those times when many stops are hit causing a swing in the opposite direction. You then use this swing to recoup your loss.

In Figure 6.16, all through May the Canadian dollar moved lower in a downtrend. If we sold on May 22 at the low of 72.87, then for the next couple of days it appeared that the trade was working out. However, the market reversed quickly. If your

Figure 6.16 Double and reverse. In this scenario, losses from the short position would have been quickly compensated by gains from a double and reverse strategy.

profits or breakeven trades. This strategy should be used only in markets that are liquid and volatile. You want to make sure that the market partakes in wide swings throughout the day, as in the currency market or the S&P 500.

The basic premise of double and reverse is that when you are stopped out, you will double up on the opposite position to recoup your losses. With twice as many contracts, it will take half the initial move to get even. When even, you can reevaluate the current situation to make adjustments. Again this is a risky strategy, but if used correctly it can deliver great results. If you are wrong, however, this strategy could potentially double your losses. If you use it correcdy, you can eliminate many potential losing trades or reduce the initial loss.

When your stop is hit, you are counting on the market continuing in that direction long enough to recoup the amount of your original loss, since you only need half the original move. Markets prone to false breakouts help this strategy, as well as those times when many stops are hit causing a swing in the opposite direction. You then use this swing to recoup your loss.

In Figure 6.16, all through May the Canadian dollar moved lower in a downtrend. If we sold on May 22 at the low of 72.87, then for the next couple of days it appeared that the trade was working out. However, the market reversed quickly. If your

Figure 6.16 Double and reverse. In this scenario, losses from the short position would have been quickly compensated by gains from a double and reverse strategy.

CANADIAN J IH1

07/02/96

b> Double I .Reverse ; (go long)

73.8 73.7 73.6 73.5 73.4 73.3 73.2 73.1 73.0 72.9 72.8 72.7 72.6

96 06

exit method used the trendline, you would have stopped out with a loss on May 29. You could have then saved this loss by using the double and reverse stop. By moving your stops to breakeven, fewer losses would have occurred if you were trailing the position with the highs of the previous day.

Multiple Position Exits

This next section is more advanced but the ideas and techniques are useful if you trade multiple positions. I strongly recommend not trading multiple positions until you feel comfortable trading with the markets and techniques you already use. Also, make sure that you have adequate capital to incur inevitable losses.

If you trade multiple positions, I strongly recommend trading in multiples of two (2,4,6). If you do not, it will be more difficult to determine where to exit each position. You can, however, take any of the techniques we have discussed and use them with as many positions as you choose to hold.

The first technique will combine the profit objective stop with the trailing stop. Choose the trailing stop that works best for you. By using this technique, you will exit half of your positions at the profit objective and use the trailing stop for the second half. This is a great technique because you can hit the profit objective fairly easily and this will ensure making some profit on the trade even if the other position is stopped out. When initially entering the position, remember to place an initial stop to protect your capital. Next set your profit objective stop and your trailing stop. If your profit stop is hit, just keep adjusting the trailing stop until you exit the second position. This will enable you to take advantage if the market starts to explode into a trend. You will be there in your position to take advantage of the move. If the market trades choppy, at least you can somewhat limit your losses due to a partial profit from the first position.

Another method is to stagger your stops by placing one tighter than the other. If your analysis is correct, then the trade should work out from the onset. However, there are times when the markets drop a little before rallying and vice versa. If your stop is too tight, then you will be taken out before the trade has a chance to work out. To counter this, you can place a loose stop on half your trade and a tight one for the other half-perhaps one at $300 and one at $500 for a maximum loss of $800 rather than both stops at $500.

Another method you can use if you trade multiple positions is to stagger your profit objectives. For example, say your system automatically exits your position at point profit (0.5 tick). You can exit the first position at 0.3 tick and the second at the original 0.5 tick stop. The 0.3 tick profit objective should be easier for the market to hit, thereby increasing your percentage. If the 0.3 tick objective is hit, the market turns, and you get stopped out, at least you have some profit to help offset the loss of the second position.

There are numerous ways you can combine different stops when you are trading multiple positions. Experiment and make sure that the combination enhances your returns rather than increases the losses or the chances of losses occurring. In