Many live traders prefer to use shorter time frames because the higher volatility provides quicker results and a more exciting experience, but deciding on a proper stopping point that mitigates risk while still preserving the experience of live trading can be difficult. This is where the cancel and replace method comes into play.
What is the Cancel and Replace Method
The cancel and replace method allows a trader to react to the market in real time to ensure higher profits, and less risk. Just as the name suggests, the crux of the method is to cancel your current stop-loss and replace it with a new one as the market continues to trend in a certain direction.
By establishing a series of market highs and lows, you can objectively analyze which direction the market is trending and move your stop-loss accordingly.
As an aside, one of the best things about the Forex market is the ability to make money no matter which direction the market is trending. That being said, the viewpoint this article will be from the “buy low/sell high” strategy. If the market is trending bearish, and you want to sell the market, simply reverse the language and move your stop-loss in the opposite direction.
How do I Use the Cancel and Replace Method
This method is used in a series of 3 steps. The first step is to establish when you’re buying in to the market, the second step is to establish your initial stop-loss, and the third step is to follow the market’s direction.
Step 1: Find Your In. The first thing to be sure of when finding your in is where the market direction is going. It takes prior research on a certain currency pair or upcoming fundamental announcements to pick your direction wisely. Nothing will kill your trade quicker than picking the wrong direction, or trading within a sideways market.
Step 2: Establishing Your Stop-loss. There isn’t an industry standard for making a stop-loss. However, we teach our students to never risk more than 5% of their total trading allowance. This way, when losses do occur, they aren’t devastating to your finances.
Step 3: Following The Market. Once your in and your initial stop-loss are created, you can now follow the market and move your stop loss accordingly. The way to do this is by first establishing a market high.
You find a market high by finding a candlestick that has two candlesticks to the left that are lower than it, and two candlesticks to the right that are lower than it.
It looks like this:
Once you establish the high, go to the left on your charting software and find the nearest low point on the chart. You then place your new stop-loss 10 pips below that point.
Keep repeating this process every time a new market high is established. As the market continues to trend, your stop loss will continue to change.
When Should I Stop My Trading Session
You should stop your trading session for two reasons. The first is when the market reaches your stop-loss. This takes a lot of discipline because there is the temptation to move your stop-loss as the market nears it.
The second reason to stop trading is simply because you want to. Maybe you hit your profit goal, or maybe you simply ran out of time…it’s up to you.
When trading short-term time frames it’s important to have a strategy that utilizes the excitement of short-term trading while still mitigating your risk. By moving your stop-loss as new market highs are created, the cancel and replace method is the perfect strategy for the short-term trader.