Managing an open FOREX currency position as a scalper is far more challenging and difficult than any other part of the trade process.

I cover 'why' managing a position is difficult in my video Position Management Is The Most Difficult FOREX Trading Phase. However, in this post, I propose 3 simple rules, or better: principles, on 'how' to do this.

I broke the topic into separate media presentations because I feel the 'why' part requires a more personal, visual approach than what's needed in the 'how' discussion here.

I'm not sure this distinction would be necessary for carry trades, whether that be swing, or longer term campaigns. A scalper is faced with not only totally different position dynamics, but totally different emotional and psychological challenges.

I feel that because a scalper's experiences are different, then this requires a different approach to position management.

This is not to say that the scalper has a totally different set of rules to learn, or follow. That's not the case.

Whether you're trading on the 1 minute, or 240 minute chart: you're just trading.

Trading is trading.

The rules aren't different because the time frame is different.

However, there is a different approach as to how those rules should be applied. Those rules need to be applied as principles — not as rules — against those differences in a trader's time frame.

The principles of position management for scalpers consist of just a very few simple guidelines. A trader should not only easily be able to understand them, but they should also see clearly how simple it should be to implement them in their own trading.

They are easy to understand, and it's pretty clear that these principles should be easy to implement.

But they are not so easy to implement.

Simplicity does not necessarily equate to 'easy'.

It might be simple to understand how to bake a cake, but actually baking that cake is not easy. Of course, 'easy' is a relative term, isn't it? Baking that cake isn't necessarily difficult, but it certainly isn't as 'easy' as reading and understanding the directions!

I don't mean to bog this post down in semantic gibberish, hand-wringing over the differences in defining 'simple', and 'easy'. I just want to support what I'm going to be discussing as 'simple' position management principles from that of someone actually easily implementing them in their own trading.

Scalping Position Management Principles

1. Evaluate The Position Based on Pips, Not Dollars
2. Evaluate The Position Only At The Hard Right Edge
3. Evaluate The Position Based On Risk, Not Profit

Those are easy to understand. You might not grasp the significance right away, for example, of evaluating the position based on pips as opposed to Dollars, but you shouldn't have any problem understanding that positions can be evaluated based on either current pips of profit, or current Dollars of profit.

If you've been reading posts on this blog, and/or viewing videos on my YouTube channel for Longwood Currency Trading, then you'll recognize that I've discussed each of these topics before.

After I cover each principle here in this post, I'll list some of those other related posts and videos which you may find informative.

My intent is not to repeat that material here just to fill up the post.

What I'm doing in this post is first to restate the principle each of these 3 particular topics implies into different terms. Then, in a final section, I'll pull them all together, and show how they should be combined into a simple, tight, and easy to understand model of FOREX currency position management as a scalper might implement.

You may also note that this list of principles of position management does not include a discussion of the aspects of trade exit, or close. You might think that should be included, and wonder why I didn't.

I consider trading to have the following basic phases:

1. Market price action analysis
2. Trade setup entry analysis
3. Trade entry
4. Position management
5. Position close

Having said that, I believe that for anyone but a scalper, a discussion of closing a position is part of the over all position management. Longer term trading requires limit orders for just about everything you do. Closing the position is among that type of order that you place as part of your position management plan.

Scalpers don't have time for a 'plan': we just manage the position once the trade itself has been made.

So, if you're more suited to long term trading, then you would have principles of exit theory as part of your trading plan's position management phase, and process.

And, look: to a certain degree, scalpers do as well. But it's no where near as involved as a longer term trader's, that's for sure.

And so, just to keep things simple for my discussion of position management, I take the scalper's approach and not include it in my position management 'plan'.

When trading, you simply can not think in terms of Dollars, or money, but rather make all decisions based upon pips.

Professional gamblers don't throw 20, $100 bills into the pot; they toss in just 2 orange chips.

20, $100 bills is a mortgage payment, or 10 weeks of food.

But, 2 orange chips is... well, just 2 orange chips.

When you're managing a position, and the status line shows price has moved $2,000 against you, no matter who you are: you're going to have an emotional reaction to that which will result in quite different behavior than if you're watching the status line and see price has moved against you just 20 pips.

Need I say more on this topic?

Well, there is a lot more to it, but this is the aspect I want to highlight at this time in this post.

The Hard Right Edge (sometimes abbreviated as HRE) is that part of a chart where current currency transactions are taking place.

Too often, traders focus on all that's happened to the left of the Hard Right Edge.

Why? To the left of the HRE is only what's happened in the past....

Is price action that's happened in the past not valuable?

Of course it's valuable, and it is considered in trading. But not in the manner in which you'd think, or in the manner in which it's taught — those would be topics for another time.

The three ways that we evaluate that data to the left of the HRE is as follows, though, as I'll show, these have nothing to do with projecting what's going on right now, or what might happen in the future — 1 minute out, or 240 minutes out, or beyond....

• Technical Indicators
• Patterns
• Price Action Structure

I'll be brief in discussing each of these topics because other blog posts and videos I've done (some referenced below in the Resources section) go into greater detail.

Just as a base example, consider a simple moving average cross over trading system based on a fast 8 ema cross 13 sma on a 5 minute (or daily) time frame chart.

What possible value is what happened with the average 40 minutes ago vs 65 minutes ago (let alone 8 days ago vs 13 days ago) have to do with any decision you'd make right-now???

You can not use technical indicators that are formed to the left of the Hard Right Edge because they have nothing to do with what's going on right now, or what might happen in the future — 1 minute out, or 240 minutes out, or beyond....

Again, these so-called 'patterns' are formed from price action far in the past. Though the theory says that what happened in the past will happen again in the future, that is confused logic from folks who simply do not understand how these patterns are formed.

Patterns are formed when an institutional trader makes a series of large transactions to fulfill a client order.

It might be the exchange of $3 Billion U.S. Dollars for the equivalent in Yen so that a U.S. manufacturer can purchase Japanese material.

If the trader simply puts in a limit (or God forbid: a market) order for $3 Billion Dollars, the market would go crazy. The trader would end up chewing his clients capital to bits.

Rather, the trader has to fulfill that order incrementally over time so as not to overtly disrupt the market.

In order to do this, the trader needs liquidity. Though the liquidity might not be there for an immediate insertion of $3 Billion Dollars, knocking out the order in $2 Hundred-Million Dollar chunks would make more sense.

And that's what forms these patterns:

Price patterns are formed from the manner and techniques which a trader uses in order to incrementally execute a large client order into the market such that he is able to get the best price possible for that client.

However, next time a large order is fed into the FOREX market, it will be with another trader, in a different institution, for a different client with different execution needs, at a different time of day/month/year, for totally different economic purposes.

Just exactly then: how would this trader's pattern then be expected to be duplicated?

You can easily see how this not only would not happen, but could not happen.

Perhaps a somewhat similar order might replicate to some degree a similar pattern.

However, to make a trade based on just vague similarities without knowing all of the particulars of the purpose of the economics of the underlying trade is just lunacy.

And yet folks teach this stuff like it was fact!

Doing so is not only annoying, but just one more thing that results in 90% of traders losing 90% of their money in 90 days....

Its maddening....

You can not use price patterns that are formed to the left of the Hard Right Edge because they have nothing to do with what's going on right now, or what might happen in the future — 1 minute out, or 240 minutes out, or beyond....

Price action structures result from transactions that are executed in areas of price consolidation, i.e. where there were a lot of either limit orders hit, or market orders executed.

Price action structures are formed in a very similar manner that price patterns are. They represent price action that occurred in the past, leaving distinguishable marks on the chart when viewed over time.

Thus —

You can not use price action structures that are formed to the left of the Hard Right Edge because they have nothing to do with what's going on right now, or what might happen in the future — 1 minute out, or 240 minutes out, or beyond....

In this post, I discuss the broader issue of how to evaluate positions in general based on risk, and not profit.

Because of this, I suggest you watch the video before continuing on with this, as otherwise much of what I have to say here might not correlate as effectively for you as I'd like it to.

Go on — watch it now. Clicking on the link will open a new window so you won't lose your place here.

I'll wait for you to finish....

This is me waiting for you....

Great. I hope that video made sense to you.

The primary currency trading concept I convey in that video, and which I reinforce in this post is:

We have no control over not only how much money we'll make in a trade, but we have no control over whether that trade will even go in the direction we need it to.

The only thing in trading we do have control over is: our risk.

Let me restate this very, very clearly:

The only thing
in trading
we do have
control over is
OUR RISK

I think you get the point....

Scalping Position Management Principles

1. Evaluate The Position Based on Pips, Not Dollars
2. Evaluate The Position Only At The Hard Right Edge
3. Evaluate The Position Based On Risk, Not Profit

Because you don't want your emotions to interfere with the sometimes split‐second decision making that you need to be on point for when managing an active position, always think in terms of pips instead of dollars.

This will make your analysis at the Hard Right Edge objective instead of subjective.

Finally,

Moral of the whole story....

By basing your analysis on pips and not dollars gives you an objective view of what's going on at the Hard Right Edge, and thus your decisions as to how to manage an active position will be free of emotion, and will be objective of the price action situation as it presents itself in real time.