I have problem to establish right risk reward ratio and I need some help here.
Here is my problem: I am trying to follow the trend on base on candlestick chart, and I would like to exit after 10 pips. However, if I place 10 pips stop loss, I am loosing more than I am winning.
From the other side, if I keep the position open, there is a chance that market can turn against me, and I will have even more loosing trades. Is 10 pips too little?
For the moment - I am still on demo, but I have to find solution and to build strategy for this in case to become profitable.
Stop losses depend on the pair and the timeframe you are trading, in general they should be 1:2 or 1:3 risk to reward, that is risk 10 pips to make 20 or one pip to make 2 or 3.
Trading the GBP/JPY on a one hour or above tf you would have to give it at least 50-60 pips of room so your profit target should be at least 100-150 pips. With the Euro on the same tf you might only need to give it 15-20 pips stoploss so profit target should be 30-60 pips.
It is also subjective and depends on your account size, skill level and risk tolerance. There is no single answer, but in general try to determine if the pair you are following on the timeframe you are following could easily move X pips in your favor, then set a stop loss 1/2 to 1/3 of X and check again to see if that looks reasonable according to the chart setup.
Practice with very small positions until you start getting a feel for it…
great advice 4xstar, If i may add quickly, 10 pip stop losses is not sustainable on ANY currency pair as far as im concerned…UNLESS you know what your doing and are scalping…even then, you should never risk more than you stand to make on any given trade.
10 pip sl’s are pretty tight. They will get hit a lot. Even when you are right.
Demo, Demo, Demo. You will find the answer to any strategy and it will only cost you time.
Since I will have small account (about $5000.00) my idea was to get small profits (10 pips) and to go out. However, due the losses that would not be possible.
I will try to play like this:
SL:35 pips, Take Profit on 70 pips.
I will not take my profit on 10 pips anymore and we will see. That’s why virtual money are for. Waiting to hear more advices from you guys.
$5000 is not such a small account … many people start with far less!
Basically you do not want to risk more than 3% of account size on any one trade … some say no more than 1%. With $5k, 1% is $50 or about 50 pips, so that is a generous stop loss.
If you are doing multiple mini-lots (and as a newbie with $5k you should only be doing mini lots) then you could risk 25 pips per position & hold 2 positions.
3% at risk would allow you to hold 3 positions with a 50 pip sl per position.
And so on.
Taking profit is not that rigid … sometimes you will take profit at 10 or 15 or even 5 pips when you planned on 50 … it depends on price action once you are in the trade. Better to take 10 pips of profit than to ride trades to your max stop loss each time!
Your stop losses should be rigid, because you must not risk too much of your account on any one trade (and believe me, I still need to work on that part!! It is not always easy…) and most importantly, you need to know BEFORE entering a trade:
Why am I entering this trade? (there should be 3 good reasons)
What is my profit potential?
What is my stop loss?
What would make me close the trade (you only need ONE good reason to get out)
3 good reasons to enter … only one to exit.
I’m still working on practicing what I preach! Although I know WHY I am entering a trade, what my pt & sl are, and even what would make me leave the trade … I am still guilty of finding ‘excuses’ to stay in the trade once I am in. Like … “I will get out if price retraces below the last candle” Then when it does, I move to a higher timeframe chart and say … ‘well, on this timeframe it actually could move down a bit more & still be valid’. In other words I turn a short term trade into a longer term one, or find other justifications to stay in … and end up losing pips when I could have just cashed in 5 or 10 pips, instead of the 50 I hoped for (because price began to be sluggish).
You also need to consider the time factor when going into a trade … if you are trading off the 15 min chart, you want price to move in your favor a lot sooner than if you are trading a 4 hour chart.
And one of the keys to forex success imho is trading multiple lots. If you think a trade is a valid one, put on 2 or even 3 positions, not just one. Then you can take profits quickly from your first position, move your stop to break-even (your entry price) on the remaining one or two positions . … and now you are trading with free money
A few years ago a trader called bunnygirl invented the BGX or bunnygirl cross, which was basically a moving average cross on the 30 min chart. The system was good & reportedly she became a millionaire & retired from trading … but … what made that happen was not so much the BGX system but the fact that she always opened 4 positions. #1 she took profit at 10 pips, moved stops on the other 3 up 10 pips. #2 she took profits at 20 pips and moved stops on remaining 2 to breakeven. #3 tp was usually 30 pips … and #4 she let ride as long as possible to catch the major runs, trailing a stop 50 pips behind.
Powerful.
I am very much opposed to the concept of fixed stop sizes for the very simple reason that the markets change - their volatility changes. A fixed stop doesn’t allow for adjustments based on those changes.
Maybe. Maybe not. Depends on your timeframe and the pair you trade. (By the way, a pip is only a fixed value for a handful of pairs).
If you are doing multiple mini-lots (and as a newbie with $5k you should only be doing mini lots) then you could risk 25 pips per position & hold 2 positions.
DO NOT think this way. This will lead to putting your stops too close. Figure out what your need to risk in pips for the trade, then figure out the contracts. Do not do it the other way around.
3 good reasons to enter … only one to exit.
This seems backwards to me. I only have 1 reason to enter a trade - the set up matches my criteria. That’s it. Quite a few things can get me out of a trade, though.
And one of the keys to forex success imho is trading multiple lots. If you think a trade is a valid one, put on 2 or even 3 positions, not just one. Then you can take profits quickly from your first position, move your stop to break-even (your entry price) on the remaining one or two positions . … and now you are trading with free money
Why would you take any trade that isn’t a valid one?
Only put on multiple contracts if it fits your risk strategy. And test out whether it makes sense to take partial profits along the way. For some strategies it will work well. For some it would actually decrease performance.
For that matter, test out whether you’re best off putting on a full position or a partial one and adding to it.
These (the three items mentioned by 4xstar) aren’t “reasons to enter” as such - they’re pre-determined parameters by which the trade will be managed: descriptive of the trade taken (or ought to be), not prescriptive of it. But, 4xstar makes a valid point: they are, in general, important questions to ask and answer before committing to a position.
Rhody, I’m talking to an absolute beginner … you have to think back to when everything was new. The example of setting a stop at 25 pips was just an example of HOW to think of max pips stoploss as it relates to overall account size. It is not a recommendation to set X amount of pips on any trade.
And your 1 reason to enter a trade is actually a whole series of reasons because your setup consists (I would assume) of more elements than just the shape of one candle, or the direction of one ma.
Of course you wouldn’t take a trade that is not valid … but that is how an experienced person thinks. For a brand new trader they have to learn how to decide if a trade IS really valid. When people are just getting started, they are often timid & uncertain of their decisions, so they just do one position, like putting one toe in the water.
I am trying to say to first have confidence in your decision BECAUSE of all the reasons (= your setup) that are causing you to take the trade … then you can put on 2 positions or more and let some ride to potentially greater profits.
For someone who is brand new, I am just trying to keep it really really simple.
Yes, the market can turn against you!
How do we handle such matters?
I would like to strongly recommend that you go thro and read my thread in which I deal with the matter of [U]risk/reward ratios[/U] in great detail.
The thread is some 45 pages long now and is the greatest teaching thread on this forum at the moment with more viewers that just about all the other threads.
Hi tymen, glad you reminded me … I was planning on reading your candlestick thread from start to finish so today is the day I start. I also believe candlesticks may be the single most powerful indicator for forex (even more than for stocks). You could make a good living just having the patience to trade 3 candlestick patterns
4xStar, I deal with new traders every single day. I am thinking about what they are thinking. You have to be very clear when you make statements because if you don’t you can cause confusion very, very easily. I see it all the time.
And your 1 reason to enter a trade is actually a whole series of reasons because your setup consists (I would assume) of more elements than just the shape of one candle, or the direction of one ma.
What you are talking about is criteria. Criteria are not necessarily reasons unto themselves. The only reason to do a trade is that all your criteria line up.
Of course you wouldn’t take a trade that is not valid … but that is how an experienced person thinks.
And we are trying to teach that to new traders - not let them develop bad habits like putting on trades that don’t fulfill the requirements of their system/method.
For someone who is brand new, I am just trying to keep it really really simple.
It’s very simple. 1) Have a tested system/method you can confidently and consistently trade before you trade for real. 2) Only take the trades your system/method tells you to take in the manner in which it indicates. That’s it.
Scaling out of a multi-unit position isn’t necessarily a simple thing. Neither is scaling in. Both approaches should be tested in relation to one’s trading system/method before being used.
I scanned the thread for what first popped into my mind when you asked if 10 pip was too tight of a stop loss i havent seen anyone bring this up if they did ignore this…
But if the pair has a 5 pip spread, are you aware a 5 pip swing after entry your down 10 pips… this is the probelm with running too tight of a stop loss, the spread becomes a huge factor in your risk reward senerio’s
so if you was shooting for say 20 up and 10 down for a 2 to 1 reward/risk.
it would actually turn out to be 20 up and 5 down since half your stop loss is eaten up by spread.
The only logical place to put a stop is where you define the point at which you are clear your trade idea is wrong. How much you are prepared to lose in dollar terms depends on many factors which include the expectancy of your system and (more importantly) your psychological fortitude. This then is the basis of determining your trade size. Even after all that the trade still has to be worthwhile in terms of your expected profits. For all of these reasons there is no simple answer to how you construct your trading system. However in general if your stop is around 10 pips you are trying to trade nothing more than noise within the instrument and that doesnt to me seem likely to be a route to longevity in this business. Thats not to say that you cant have an approach that looks for very tight entry criteria. I trade sometimes the 78.6 fib retracement (look at Daedalus’ thread for ideas with fibs) and this can give tight entries with technically relevant stops occasionally with multiple R payoffs. My final thought is that one has to be wary of beingtoo prescriptive or critical of anyones approach as there are limitless ways of being successful in this business (and perhaps more limitless ways of being unsuccessful!). This I think is the biggest problem for new traders. There is so much to learn, so little really known when we are dealing with uncertain outcomes and an overbundance of randomness and a tendency to think we know more than we actually do. As a result most washout before they have learnt anything of value
Recently I learned about something called a ‘time stop’ which means, as I understood it, that as the trade progresses, you keep raising your stop even if the trade is not yet moving in your direction. So for example you enter a trade, thinking to take profit at +25 and you set an 8 pip stop because that is the point at which your trade would no longer be valid (as you said above).
Now the trade progresses, but doesn’t really move much … one, two pips in your direction. Depending on your time frame, you let one or two candles close and then start tightening your stop. After maybe 4-5 candles your stop is now at breakeven or breakeven + spread, if you close you are maybe one pip in profit and your stop is now only 2 pips below your current price, obviously it can be hit any moment.
The idea is, if the trade is not progressing in a timely manner, the time stop will get you out with a tiny profit or minimal loss. But you will not be languishing in a trade that is just not going anywhere. Time to move on & look for another one.
Since learning about this, I have applied it several tiimes and I like the way it works. Prior, I would sometimes hold onto a trade for hours and it would eventually hit my initial stop, so I would lose 8 pips and many hours of trading time instead of 1 pip and a few minutes of trading time.
This is just another variation of what you were saying above … the only logical place to put a stop is the point where you are clear the trade is no longer valid … and you can factor time into this as well.
I traded commodities many years ago; was doing very well until copper made a U turn- it took 2 1/2 days before my SL was honored and wiped out my acct. Good lesson, 2 yrs experience and zero +or- $. But something always made sense to me that comm. traders swear by: don’t take profits off the table! Rhody mentioned scaling in and this is my thought - when you take a position why not enter with a very small position and then if the trade keeps going your way add another lot. If it continues to go, keep adding lots and adjusting the SL.
I never see this discussed or used with any strategy - must be some error in my thinking; comments?
While this might be a variation on the idea, the basic concept of a time stop is to exit if the market hasn’t done what was anticipated within some predetermined period of time. This doesn’t necessarily have to mean trailing a stop, and in fact that could potentially hinder performance (test it, as always).
A lot of traders use timestops in one fashion or another, even if it’s something as simple as closing out one position that’s doing nothing to open another which looks more attractive.
“Scaling in” on a winning position… is not a new concept, it is as old as the art of speculation is…
Check out “Reminiscences of a Stock Operator” Jesse Livermore talks about Always Scaling in a winning position in 1/5. And this was more than 100 years ago. ;o)
