How do you go about setting stops and profit targets for long term position trading? Also how do I calculate size as a % of my bankroll given that knowledge?
I follow a pretty orthodox method, I can explain what I do - you might find modifications beneficial dependent on your trading style and personality.
Stop - Must always be set immediate on opening a trade. Found using TA, e.g. if opening a long position, the stop would be a little below the low of the last significant swing low day: the idea is its a level below which price has potentially broken out of its uptrend and is more likely to go down than to go up.
Take profit - I don’t set an exit order. If I buy into an uptrend, I don’t want to be closed out when price starts to accelerate in my direction. I review prices at the end of the NY session each day and close manually if price has reached my break-even level but is starting to fall out of its recent upwards action. But if a sell signal doesn’t trigger I hold in order to get at least the occasional big winner. I don’t move the initial stop-loss ever.
Risk - I adjust the size of my position so that the distance between entry and stop reflects a small percentage of my account capital. Such a small percentage that I could stand a run of losers and not get knocked out of the market. many people recommend 2%. I find that always using a set risk in terms of pips is a certain way to get random results.
By [I][U]evidence[/U][/I], i.e. in the light of backtesting and forward-testing results, selecting whatever’s appropriate, for each type of trade I do (that’s very few types), in that it produces the best overall results [I]within my risk-management parameters[/I].
My stops and targets are volatility-related.
For my stop-losses, the key concept is that I always set them at a point at which, if the price reaches it, I’d no longer want to be in the trade (because the price-movements since my entry would have made it an invalid entry).
In practice, that usually means that for a long position, my stop-loss will be just below the most recently formed swing-low (and [I]vice versa[/I] for short position).
My targets aren’t quite as simple, because with most of my entries, I’m trying to combine avoiding losses by locking in some profit as quickly as possible with letting a proportion of the trade “run” (if it will), trying to catch the start/early part of a developing trend (it doesn’t happen very often but it’s great, when it does: it’s the occasional jam that accompanies the everyday bread and butter).
In practice, that usually means exiting about a third of my position-size quite quickly, another third not long after, and letting the last third run (when it does).
But it’s all still volatility related, and that’s the important thing.
You probably need the gap between your entry-level and your (initial) stop-loss to work out at a fixed percentage of your account?
What percentage that should be, for each type of trade, is going to depend on your risk-management parameters, some of which will be subjective (depending on your degree of risk-aversion).
If you want a specific suggestion, I suggest never letting that be more than 1% of your account-value, at least for your first year of trading a live account.
The 2% figure sometimes recommended in forum conversations is far too high for me, since I’m very conservative and risk-averse.
What matters, really, is to learn how to work this out for yourself.
There’s a free position-size calculator you can use, here: [B]Position Size Calculator: Free Online Forex Position Sizing Calculator[/B]
Recommended reading (for all three of the questions you’ve asked) …
[U]Lowest level[/U]: [I]Trade Your Way to Financial Freedom[/I] by Van K. Tharp (especially the second half of the book - very useful to read before trying trading on demo - a downloadable PDF copy of this one is floating around online, I’m told);
[U]Slightly higher level[/U]: [I]Profitability & Systematic Trading[/I] by Michael Harris (Wiley, 2007 - I’d advise nobody to trade with real money until they’ve read this one - also available in PDF form, I think);
[U]Slightly higher level again[/U]: [I]The Mathematics of Money Management: Risk Analysis Techniques for Traders[/I] by Ralph Vince (there are one or two people here, admittedly, to whom I’ve recommended this excellent book, who have found it slightly “hard going”, so although I think it’s actually the best book of the three, I also know that it’s probably not for everyone).
None of three books listed above is specific to [I]forex[/I] trading - but that isn’t relevant at all.
Good luck!
PS (edited to add …)
I completely agree. 
A “set number of pips”, regardless of the other considerations mentioned above in Tommor’s post and in this one, is [U]not[/U] a recipe for success: that’s basically trading on hope, i.e. trying to get the market to give you what you want to take from it, rather than being responsive, yourself, to its current behaviour, within your own risk-management parameters.
Additional food for thought: one [I]possible[/I] way to make targets volatility-related is to make them proportional to the ATR at the time you enter the trade.
Hello PipDonk,
A stop loss is a simple limit to how much capital a trader is willing to risk on any one trade. Now, the trick is to exit a trade when you earn a respectable profit, rather than waiting for the market to come crashing back against you and exiting out of fear. After determining the most logical placement for our stop loss, your attention should then shift to finding a logical profit target placement and also to risk reward.