Trading and Part Closing

This week we’re going to look at a trading strategy that works towards both maximising profits and minimising losses, namely part closing.

Put simply, part closing is closing part of a position when it is in profit to lock in some of the profit.

The Profit

Here’s an example:

Buy £2/pt @ 7,350 FTSE Daily rolling. The market then moves up in our favour.

Sell £1/pt @ 7,370 (locking in £20 profit, leaving £1/pt still open) – this is the part closed.

If the market carries on moving in our favour, the remainder of the position is still open so that we can continue to profit from the move (albeit to a slightly lesser extent than if we had our full position on).

For example, if the FTSE 100 continues to rise another 10 pts before we decide to close out @ 7,380, we bank another £30 and net a profit of £50.

In the event that the market turns against us, we can be safe in the knowledge that we have already locked in some profit at a good price.

Minimising Losses

Having looked at a maximising returns scenario, we now turn our attention towards minimising losses. If we part closed half of our position 20pts in profit, (Buy £2 @ 7,350, part close £1 @ 7,370) we’re now looking at where we can position our stop loss and we have a couple of options.

The first is our entry price. If the market were to fall back to our entry price (7,350) having already part closed half of our position, getting stopped out here we would end the trade with a tidy 20pts profit. Not bad for a day’s work.

The second point we could look at is 20pts below our entry price (7,330). It is at this price our trade would now break even and would close out with a net result of zero. (20pts profit locked in – 20 pts lost = 0pts net)

Having locked in our 20pts profit by part closing, we pushed our break-even point down by 20pts, from our original entry price of 7,350, to 7,330. Thus allowing us more flexibility with the trade and improving our risk: reward ratio. Of course it is also worth remembering that stop losses are not guaranteed.

When employing this strategy, I like to trade in even stake sizes so that I can part close half (or sometimes a quarter) of my position at a time. It can be done using odd number stakes, but the sums involved for quick calculation of stop loss levels get more complicated.