Our goal of developing a consistent, disciplined approach to trading has brought us up to point #4 in our list of actions that should be taken on every trade.
[B]1. Determine whether you are looking for a buy or a sell.
2. Find your entry.
3. Identify your initial risk.
4. Find your exit.[/B]
Last week we determined that our risk on the trade was 58 pips, so we know where we intend to get out if the market moves against us. But what if the market moves into profitable area? How many pips should we be looking for in a profitable trade? While most new traders work on finding that “perfect entry”, which is an elusive goal, the exit strategy is what can determine the profitable traders from the rest. Too many times we hear about new traders who have a profitable trade on their hands, get out as soon as the market moves a few pips against them. They are worried that the winner will turn into a loser, so they take profits early in the trade. You can’t lose ringing the cash register is an old line that you will read or hear if you spend any time trading. But the answer is yes, you can lose by taking profits early. If you are disciplined in your approach to the point where you can win half of your trades, you obviously have to win more when you are right than you lose when you are wrong to be consistently profitable. This is where the trading part comes into play.
Professional trend traders are experts at “working a trade” in order to get as much out of the move as possible. After all, they are trading with the trend and they never know when the move will be the big move that could make their year. These traders typically only trade with a stop order in the market to protect from big losses but they will also move that stop as the trade becomes profitable to protect gains. As the move continues, they continue to move their stop with the market, hopefully just out of range in order to stay in for the long run. But this is difficult to teach to new traders, so we have another recommendation. We want to use a 1:2 risk:reward ratio on all of our trades. That means that we look for two pips in profit for every pip we are willing to risk on the trade. Since we are risking 58 pips on our trade, we should look for 116 pips in profit. When we enter into the trade, we can also set our protective stop and limit order to take profits. That way we also do not have to watch the screen all day and all night. However, sometimes we found that a trade could run all the way up to within a few pips of profit and then moved all the way back down to stop us out at a loss. Not a good situation. So to keep this from happening, we use the trailing stop feature on the FX Trading Station. So our trade includes an entry, an initial protective stop level which gives us a risk of 58 pips, a target to take profit at 116 pips and our trailing stop. We recommend using the same trailing stop value as your stop. So if we are risking 58 pips on the trade, we should use a trailing stop of 58 pips. This way if the market moves halfway to our target, our stop is moved up to breakeven. This way we can theoretically only profit 116 pips on the trade or break even. Not a bad position to be in and an excellent money management strategy for new traders to use on their trades.
