HalveIncrease Your Opportunities With The Halving Technique
If you want to take live trade positions, it is important you know what it means to halve and how to use it in your trading. The technique is very simple and it works: it is based on the division of capital investment into several parts/chunks, so as to have an input range and not a precise point. It’s a method of gradually scaling up your position by adding lots little by little till it reaches its max percentage exposure. This as a risk management strategy helps in reducing the desire to over trade as well as reducing exposure on an account.
In a previous article we wrote that halving was "almost" never a strategy.
The "almost", made us realize that in certain moments and market conditions the trader must really halve, we shall now analyze in which situations.
Mean reversion strategy
In a mean reversion strategy, a trader may want to adopt halving. This type of strategy is a theory that compares price deviation relative to its moving average with an assumption that price will return to its average i.e. investing or taking a trade position against the momentary trend based on the assumption that price is overbought or oversold, and therefore thought to return to its average or mean. In order to identify these excessive deviations caused by high volatility, you can use B% indicator or Nick Rypoc Trail and Reverse indicator (NRTR). The B% indicator, built on the Bollinger bands gives warning signs when it signals excessive prices. When prices come out of the observed statistical range, 2 / 3 halved investing operations can be opened on the fact that prices will return back towards the moving average, usually set on 20 period Moving average.
In proximity of Supports and Resistances
Everybody knows that points of support or resistance are very precise "points" where prices will go “bouncing" back and forth. Placing limit orders around these levels is often a winning technique, especially in low volatile conditions. Support/Resistance is often "overridden" temporarily causing false breaks. In fact even when they appear temporarily overridden, the price often has a tendency to go back producing the expected rebound. Deploying halving technique can be helpful in a case whereby prices move beyond our entry point that coincides with support or resistance lines, hence gradually increasing to your preset maximal allowable lots per position.
How do you halve?
Halving does not mean increasing the investment, but dividing the size of investment into several lots or shares. So if we are going to invest EUR 10, to apply adequate risk management, the trader should divide the capital invested into 2 or 3 separate investments in the form of lot size at slightly different times and one after the other.
Acting this way you would have the possibility to halve the position without increasing the invested capital and optimizing the entry price.
Apart from deploying halving in mean reversion strategy and support & resistant strategies, I will advise it for trend following strategies as well. Take for instance if a trend line is established and the maximum percentage risk exposure on capital is 5%. We can break the percentage risk exposure into 3 parts i.e. 2% -2% - 1%. As smaller entry signals show up on a lower time frame, we can gradually scale in one smaller percentage risk after another as the trend progresses till our maximum percentage risk is exhausted.
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Please take note that a general stop loss level is established for each of these entry points, and the trades should be entered based on percentage risk exposure of the capital. Hence different lot sizes will be generated but the same total % exposed is still the same.
the Analyst's answerJean Grossett - Financial analyst
Halving technique will increase your ability to manage risks, with a little reduction in the profit potential. However if you ask me, I consider that as a cost of doing business. It will generally reduce the fear of being wrong, which is usually experienced by traders when entering trades based on a researched signal.
the Manager's answerRobert Danvil - Investment Manager
Halving is a prerequisite money/risk management strategy that guides a trader or investor towards gradually scaling up his or her percentage risk exposure (lot sizes) till it reaches the preset maximum percentage risk exposure (maximum allowable lot size) per day. This is usually achieved by dividing the preset maximum allowable lot size into smaller chunks. This is done with the aim of reducing risk in a case whereby the result of a trade setup is wrong, the maximum allowed lot size per position is not exposed.