Stop loss and Take profit Q

I just want to make sure I am understanding things clear and any advice much appreciated.
OK so I am studying a lot more then trading. Trying to get 3-5 trades per week as a start.
TP and SL has been my focus for the past week.
I use trend lines and support and resistance mainly for my trading. Starting from 4h down to 30 minutes I draw a masterpiece :). And my entries are at the 30m or 1h.
Ok so to determine a SL if I am going long I pretty much go back to previous supports levels to determine where price has been and where it may lead to if it goes against me and thats how I estimate it.
With my TP I always look to go into trades where risk to reward ratio will be 2:1.

Is this pretty solid way to set SL and TP or completely off? Any advice much appreciated.

Also I have been reading risk ration % should be 1, 2 or upto 5% but this seems ridiculous to me so I have been trading with 10% max.

To me, absolutely everything you’ve said above sounds extremely sensible, and a really good and commendable approach. :cool:

“Up to 5%” is disastrously big, and up to 10% unimaginable.

I’ll try to explain why, so that 1% or 2% position-sizes [I][U]don’t[/U][/I] seem ridiculous to you, but utlimately a solid explanation from a beginner’s textbook is probably going to make a lot more sense and be a lot more coherently and logically and systematically explained than any ultra-brief “forum explanations” of the subject, and in this context I’s strongly recommend both Van K. Tharp’s [I]Trade Your Way to Financial Freedom[/I] and Michael Harris’s [I]Profitability and Systematic Trading[/I].

Here’s the thing: if you’re trading with a 2:1 reward-to-risk ratio (and there’s absolutely nothing wrong with that, at all), then look at it this way - if you had no skill at all, and effectively all your trade outcomes were “random”, you’d expect to win about one third of your trades and lose two thirds. That gives you an “expected win-rate” (without allowing for any skill and without allowing for any good luck) of 33%. We both you’ll hope you’ll do slightly better, of course, but one has to allow for bad times, and if you actually [U]have[/U] a win-rate of 33%, then it’s almost a certainty that eventually you’re going to hit a losing run of 20+ trades [U]without doing anything wrong at all[/U], just because that’s a [B]normal statistical expectation[/B].

And (more importantly) it’s something between [U]five and ten times[/U] as likely as that, that at some point you’ll have a “long, bad [I]patch[/I]” of which the net financial outcome is equivalent to a losing run of 20+, even if the actual “consecutive losing run” is a lot shorter than that.

All those times that you’re a bit unlucky and lose three or four trades in a row, then have one winner, then lose another three or four in a row: you don’t have to have many of those to hit a bad patch which is financially equivalent in its outcome to 20 consecutive losers. If you’re using 5% position-sizing, that’s going to kill your balance, and it’s probably going to happen sooner rather than later.

From what you’ve said above, I think you should probably be using [B]1%[/B] position-sizes.

And if you go above 2%, you’re really gambling with it … and that would be a great shame, given that everything else you said, at the start of your post, sounds [B][U]so[/U][/B] well thought-out and reasonable and promising! :slight_smile:

This is a subject which is really [I]terribly counter-intuitive[/I], so let me say again that reading the books I’ve mentioned above would be hugely helpful to you, because inevitably they explain it far better than I (or anyone else here) realistically can, in a forum post.

And good luck! :cool:

As you said you are a new trader and still learning, which means you have not enough experience and you don’t have a consistently profitable strategy. So this means you should spend a lot of time on trading education, especially on the risk management part, because risking more than 5% on a single trade it is just WRONG.

As a beginner, I would say risk not more than 1% be it demo or real account.

You Risk to reward ratio should be the other way round- 1:2. Aim for that so that even without a high win rate, you can still be in profit at the end of the week or month. With Risk/Reward ratio of 1:2, you would need to have a very high win rate like 80% or above to make any good profits.

Hope this helps

I think that was probably what the OP intended to say: it’s very common in forum conversations here for people to say “risk-to-reward” when they actually meant “reward-to-risk”. :wink:

A trader can even risk 20% or 35% of his trading account. I use a certain amount in my trading account, the rest of my capital is in my payment processor or in my bank. Forex trading is risky sometimes bad things can happen, so don’t put all of your trading capital in one single account. Keep some back up and use all this amount (bank + trading account) as your trading capital and then risk appropriately.

As Crisp mentioned, trading at the end of the day is somewhat of a gamble. You need to do so with prudence and never put all of your eggs in one basket. In any case, trade smart and good luck!