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Analytical Toolbox: Adding Money Management to Set-Ups & Exits

By Clare White, CMT, Optionetics.com | Thu October 27, 2011 11:14AM PT


Trade set-ups with multiple signals that are increasingly favorable to the position can be part of an aggressive or conservative trading style. When adding money management rules that incorporate a scaling-in approach for the position, those trading guidelines may very well find more universal appeal. The squeeze set-ups discussed in the last few weeks provide the potential for a scaling in approach

Money management can also be applied to different trade exit rules that are considered conservative or aggressive, with a scaling out approach providing more middle ground for traders. The addition of Wilders Parabolic Stop & Reverse [PSAR] indicator last week provides a second signal that may be used to scale out of a position.

When considering a method that scales into or out of a position, the trader always wants to identify all of the rules for the approach in advance. An early, aggressive entry needs a clear exit rule if the position goes against the trader, as well as a secondary signal to add to the position when appropriate.


Varying Trade Entries

In the Analytical Toolbox: Bollinger Band Set-Ups and Scans article from September 29th, the following information was provided for the squeeze set-up:

"The set-up also requires assessing the likely price direction once the breakout occurs. This can be accomplished using additional tools, with volume indicators referenced by Mr. Bollinger as an important consideration. Although a move in one direction may seem favored by the indicators, it’s not uncommon for an initial move to occur in the opposite direction first. This is a smaller move than the more explosive breakout expected. The presence and nature of such a head fake is dictated by both the trader’s indicator settings and the characteristics of the underlying security."


When a potential squeeze candidate is identified early and a head fake appears, the trader may have an opportunity to establish an initial, smaller position that would be considered more aggressive. Assuming the indicators were pointing to a bullish resolution and this initial entry was a long position, a stop would be placed right below the closing low where the head fake occurred. This stop would be moved upward in the event the expected bullish move took place.

A second entry point could be established with a close above the simple moving average [SMA] used for band construction and would be considered more conservative. This article assumes an initial, aggressive entry of 30% for the total position, with the remaining 70% of the position taken on the second, conservative signal. Once the full position is established, the stop on the initial trade is moved up to a close just below the SMA.


Varying Trade Exits

Trade set-ups are nice, but incomplete, without an exit plan. Different approaches vary the risk-reward profile with delayed signals increasing both. Traders can use movement through the Bollinger Band’s SMA or a touch of the opposing band (more aggressive) to exit a position. The trade-offs for these two different exits include:

  • An SMA signal reduces both risk and reward with the potential for more false trend change signals,
  • An opposing band signal can maximize both risk and reward by allowing for larger price swings.

One way to reduce false signals for a more conservative signal is by using a filter which requires multiple closes to signal an exit. For instance, the trader can stick with the more conservative SMA cross and reduce false trend change signals by requiring two daily closes though the SMA.

In all cases the trader should consider their own maximum risk level and use this as a minimum stop point.


Money Management Example: GS

Consider a scaling in and out approach that uses the different entries and exits discussed. Figure 1 displays a daily line chart for Goldman Sachs [GS] with Bollinger Bands (20-day SMA, 2 SD), the Accumulation/Distribution indicator, a 14-day Relative Strength Index [RSI] with Cardwell ranges, and PSAR.


fig 1 e1

Figure 1 GS Daily Line Chart with Bollinger Bands, A/D, RSI and PSAR (9/3/09)


Trade guidelines can include the scenario that follows.

1. A small initial position (30%) may be established when price action is bullish and confirmed by volume and the RSI (>40).

  • If an initial entry occurs when price is between the lower band and the SMA, a stop is initiated immediately below the previous low.
  • If an initial entry occurs when price is above the SMA, a stop is initiated immediately below the SMA.

Figure 1 displays bullish price action confirmed by volume and RSI, so an initial position is established at the open on the following day, 9/4/09. The stop is place below the low on 9/2/09.


Continuing with the trade guidelines:

2. The position is added to (+70%) if price closes above the SMA.

Assuming a full position is established with price above the SMA, the position is exited if:

  • Price closes below the SMA or
  • A new bearish PSAR signal is generated.

Note the reduced volatility that results in the contracting bands may e accompanied by shorter-term PSAR reversals. It’s possible a bullish position is established when PSAR is bearish which is why a definitive exit via the SMA is required and the trader may need to wait for a new bearish PSAR reversal.


On 9/4/09, price closes above the SMA (Figure 2) so the second portion of the position is established at the open on the following day and the stop for the entire position is adjusted to reflect a close below the SMA.


fig 2 e2

Figure 2 GS Daily Line Chart with Bollinger Bands, A/D, RSI and PSAR (9/4/09)


On 9/5/09 price continues upward initiating a bullish signal for PSAR. Now there are two potential triggers to scale out of the position:

  • A close below the SMA or
  • A new bearish PSAR signal is generated.

Either signal triggers an exit of 30% of the position while. Price continues upward until PSAR gives a bearish signal on 9/25/09. 30% of the position is then exited at the next open. Figure 3 displays the signal generated on 9/25/09.


fig 3 x1

Figure 3 GS Daily Line Chart with Bollinger Bands, A/D, RSI and PSAR (9/25/09)


The remaining 70% of the position is exited with a close below the SMA or if the price action turns PSAR bullish once again, with a new bearish PSAR signal. Figure 4 displays this last trigger that occurred on 10/16/09 when both exit signals triggered.


fig 4 x2

Figure 4 GS Daily Line Chart with Bollinger Bands, A/D, RSI and PSAR (10/16/09)


Table 1 provides a summary of the signals generated for GS with the money management discussed.





Next Open

Position Size

Entry 1

A/D support, Higher low



+30% Total

Entry 2

RSI>50, Cross above SMA



+70% Total

Exit 1

PSAR bearish (1st)



-70% Total

Exit 2

Cross below SMA



-30% Total

Table 1 GS Squeeze Trade Set-Up with Exits


Once again, keep in mind traders may also use a fixed max loss amount or any other similar risk management technique that suits their personal style. Keep in mind that if you are regularly stopped out of a position because it reaches your max risk before any other signal is generated, you may want to reduce your position size so you allow this type of set-up the time it may need to be profitable.

Please see previous articles and the book, “Bollinger on Bollinger Bands”, from John Bollinger, CFA, CMT, for a more complete discussion of Bollinger Band trade set-ups and exits.



Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site

Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.

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