The Free Trade Strategy

Posted on by The INO.com Team

Trader's Blog would like to welcome back Bill Poulos from ProfitsRun.com. Whenever I ask Bill to come and teach, he always delivers. This time is no different with his article on the free trade strategy. Please take time today to read the article, comment below, and also if you'd like to learn more from Bill check out his “Forex Smart Start Profit Strategies Session” webinar here.

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Trading the Forex markets is risky business, make no mistake about it.  As a trader, if you do not pay attention to risk first and foremost, you will lose, plain and simple.  There are at least two key aspects to managing risk.  One is the placement of stops and the management of the trade as it unfolds, and the other is the position size of the trade relative to the trader's account size.  If either one of those is not handled properly, the trader will lose in the end.

The good news is that both can be managed to the trader’s advantage resulting in minimizing losses and providing the opportunity for great profits.

One technique to reduce risk in a trade and dramatically alter the reward to risk ratio in favor of the trader is what I call the Free Trade Strategy.  The Free Trade Strategy is very simple to apply to any trade and supports what I believe the initial goal of every trade should be, namely to reduce the risk in the trade to zero.

Here is how it works.  Once a trade in entered and triggered, the initial stop should be placed where the trader does not expect the market to go and if it goes there the premise of the trade is compromised and the trade is stopped out for a loss.  However, as soon as the market moves favorable to the trade by a critical amount of pips, the initial stop should be moved to breakeven.  By doing so, the initial risk in the trade has been zeroed out and puts the trade into a “Free Trade” status, where the only question remaining is how much profit will be made on this trade and if none, will be stopped out at breakeven.

This strategy then dramatically alters the reward to risk ratio in the trade as well as the expected reward to risk ratio over a series of trades.  The trader might enter into a trade with a one to one ratio based on the initial stop and profit target, but upon moving the initial stop to break even, the risk is now zero with nothing but reward remaining, so the ratio skyrockets in favor of the trader from one to one to mathematically undefined.

But of course, the key to this strategy is to know when to move the stop to breakeven.  If it is moved too soon, the trade may be stopped out prematurely, missing out on the ensuing profit potential.  If it is moved too late, otherwise breakeven trades may be stopped out at the initial stop for an unnecessary loss.

So here are the Free Trade Strategy rules.  First, take note of the Average True Range (based on the last 20 bars) as of the bar before entering the trade.  As soon as the market moves favorable to the trade by 75% of that Average True Range (meaning the open profit in the trade is equal to or greater than 75% of that Average True Range), change to initial stop to breakeven, zeroing out the risk in the trade.

That’s all there is to it, simple but powerful and you can apply this strategy to any time frame.  Now there will be times where the trade will be stopped out prematurely, but over a series of trades following whatever method the trader uses, the expectancy for that series of trades should be greatly improved by adding the Free Trade Strategy.

Thanks again to Adam for having me today and I look forward to answering your comments!

Good Trading,
Bill Poulos

Also I'm hosting my first ever “Forex Smart Start Profit Strategies Session” on Wednesday, March 3rd to help frustrated forex traders break down their real world problems with solutions that work.

To grab a seat in this very cool session, click here.

20 thoughts on “The Free Trade Strategy”

  1. You made some decent points there. I seemed on the web for the problem and found most individuals will go along with with your website.

  2. Hi, everyone and thanks Bill for sharing!

    I'd like to ask about this strategy if you actually move your stop to breakeven when price just hits 75%ADR for the first time or after last candle close above 75%ADR?

    I mean, do I need a green (or red) body above the 75%ADR or is it enough with a candle shadow over 75%ADR?

    Thanks in advance!

  3. This is a great tip! I can certainly see how this strategy can pay off in the long run. I wish I had done this last night! I went to bed thinking I'm money and work up to find I'd lost all my gains and was actually in the red. Just to make sure I have this right, is this the basic calculation?

    If I enter a long position in a currency pair priced at $1.2500 with an ATR of 0.0105 pips, I would want to find my break-even point as follows...

    0.0105 x 0.75 = 0.0079 pips

    $1.2500 + 0.0079 = $1.2579 break even point.

    And vise versa if I enter a short position? Is this correct?

    Thanks for taking the time to share this strategy and I'll be looking forward to your seminar tomorrow evening.

    Justin

  4. Great stuff regarding reducing the risk to zero ASAP. Can you please expand on what are your guidelines are for setting stops/profit taking in trades after this? (I trade in stocks specifically!)

    e.g if I buy 100 shares at 30, the ATR is 1.00, then by your method, I should move my stop to 30 (+ some to account for commissions) when it gets past 30.75.

    My question deals with what to do as the price keeps rising (say 32,33,34). i.e. What are your guidelines for raising stops and/or selling part of your position for taking/maximizing profits?

    Using your method, one way would be to raise the stop (to something?) every 75 cents of the stock move. I know that there's more to it than that.

    This is by far the part of trading that I have the most problem with.

    It's easy to buy initially and to sell when stopped out. I just want a better technique for taking profits vs. letting the trade run.

    Again thanks.... Joel

  6. Dear Adam

    Sounds like your Aussie trip was great!

    I asked a few weeks before your departure if your product worked with Australian Equities, you replied with wait till i return from Australia, how did you go?

    KR
    Angelo

  8. This trade management is something that I know is important and that I need to do on every trade, but I often struggle with exactly when I should do it.

    I am very happy to see someone share their non-discretionary system for adjusting stops after one has entered a position. I will evaluate and try it out with my trading.

    Thanks!

    1. LD

      You're absolutely correct.

      I think the emotional aspect of it is understated here by me - there is immense power in walking away from your computer when you know the WORST that can happen is you broke even on a trade.

  10. I do not believe that the "free trade strategy" trading rules are understandable. Can you give an example or expound in simple laymans terms and direction?
    Thank you

  11. Conceptually it makes sense but if you're just defining the breakeven point as your entry point without taking into account the bid/ask spread and commissions (if any) it's not really quite breakeven. Or does your breakeven definition take that into account?

  12. Thank you for this excellent guideline for adjusting the stop loss. As a long time buy and hold (or buy and lose value) investor trying to add trading discipline in entry points and stop losses, I have found that while everyone can easily give advice as to when to purchase the stock, and most stress the importance of stop losses, few will give any guidance about when to take profits or managing the stop losses as they hopefully shift into break even and then to protect profits mode. Frequently these same individuals will quote that it is set by individual investors risk tolerance, the specific stock, the market conditions, without giving any real guidance on how an individual would use all of the above to manage risk and maximize profits. Your concise formula is stock and current market specific and will allow the beggining trader the opportunity to use training wheels while building confidence in the process.

    1. Joe,

      Thank you for your feedback.

      One of the difficulties many educators face is they cannot tell any individual what to do -- we have to leave many of the decisions to you (by law, isn't that nice).

      But if we can arm you with better information and strategies that you can use to strengthen your decision-making, I'd call that a good day at the office.

      Be smart out there!

  13. A simple, elegant strategy that is very appealing, but you only mention the Forex market. It seems to me this strategy could be used to trade any market. Is that true? Any change you would make when trading stocks?

    1. Hi Robin

      I initially applied the strategy to my forex teachings and courses but it has wider application.

      When trading stocks, for example, you have to factor in your per share cost basis before applying the free trade strategy; and that cost basis must be both ways (to enter and exit the trade).

      For example, if you buy 100 shares of stock and your cost for the trade is $ 7.95, you would need to multiply the $ 7.95 times 2 (for the resulting sell order if you are stopped out), for a total cost basis of $ 15.90 / 100 shares or .16 (rounded). That's the amount above your entry price you would move a 'free trade' stop loss.

      If your entry price was $10.00, your 'free trade' stop loss then would be $10.16 -- eliminating your trading cost and preventing a loss.

      Forex, obviously is different due to the spread being reflected in the price of a traded pair.

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