today i will like to touch on planning your trades and the extreme importance of using Stop Loss ( SL ) and Take Profit ( TP ).
Yes i know many of you prefer to let it “run free”.
However this is a highly risky style of trading.
Look at the price movement during the recent Non Farm Payroll. Each candle represents 15 minutes.
If you happened to be out having dinner, you might return home to find that your account had margin called due to the whipsaw if your lot size was too huge.
The movement on the right was more than 100 pips!
Therefore setting your SL is critical as it limits your risk exposure.
Although SL are not 100% guaranteed, it usually gets executed to the pip and it is definitely better than none.
Holding on to the losing position for prolonged periods, especially with an insufficiently funded account is like holding on to a time bomb.
You will never know if the next move will take your account out.
In forex, no one wants a visit from Mr Margin Call.
If your position was right and the price had moved in favor of you, always lock in your profits.
The next common mistake most make besides not using a SL is not shifting your SL to lock your profits.
Now that we know the importance of Stop Loss, how about Take Profit?
Well, after limiting our risk, we need to limit our exposure to the market.
Forex is a highly volatile market. Prices may turn the other direction without warning, wiping out your loss and taking out your SL.
The movement you have reached your target, bag your pips and be happy about it.
Lingering around for an extra minute means an extra minute of exposure to risk.
Take a look at this example.
Here, the trader had decided on a long position, targeting 1.4800.
Fortunately, his analysis was right and the price did reach there.
However, as he did not set a Take Profit, the price briefly graced 1.4800 and came tumbling down.
To make things worst, he did not shift his SL to lock some profits and end up hitting his full SL instead.
A perfectly positive trade turned red.
Therefore it is equally important that you have a TP set for the trade.
To fit proper money management in here, is simple as ABC.
Account has $1000
1) Calculate the amount you want to risk. 2% is $20.
2) Calcuate the number of pips you need for your SL. Say you feel that the current conditions warrants a 20 pips SL
3) Size your lot according to this. $20 / 20 pips = $1 per pip.
This will be one micro lot for the EUR/USD
Your TP should the very least not fall below a risk and reward ratio of 1:1.
This means if your SL is 20pips, TP should be 20 too.
Ideally, 1:2 is good.
If you fall below 1:1, for example 1:0.5 ( Using above example, it will be SL 20 TP 10 ), it means that you need to score in 2 positions to cover one potential SL hit position.
Therefore you must consistently take more than 2 winning positions in a row to profit from your trading.
Pretty tough if you ask me.
Therefore never drop before 1:1. If possible, 1:2.
This is it!
You have yourself a trading style with proper money management and planned SL and TP levels.
Sounds professional eh?
Trade safe 🙂