Taking profit is the easiest job in the world.
However, we need to trade smart if we want to squeeze every penny from a trade.
This is where using trailing stop loss orders come into play.
Ideally, as you build your account you would like to target twice as much as you are risking, so a risk reward ratio of 1:2.
This will greatly boost your confidence knowing that your trade ideas are currently potentially making twice as much as you are risking i.e) £400 potential profit vs £200 potential loss.
However:
these reward levels are merely targets – it doesn’t mean you should close the position straight away like most people do.
Want to know the big secret that all the investment banks, institutions, and hedge funds use??
They keep their winners open for as long as possible.
See, they don’t use witchcraft or voodoo to outperform everyone else.
They let the market tell them when it is time to take their positions or add more.
This is an excellent tip with forex trading for beginners.
That being said, they do have areas of the market where they seek as valid exit points.
Even if the market reaches their take profits, they would usually let their trade continue by using a trailing stop loss to lock in the profits along the way.
It’s one of the most common problems beginners and amateurs alike suffer from… Taking profit TOO early.
Profit is profit as they say, but to survive this game you must let the market do the work for you.
In this brief guide we will highlight the exact skill needed to separate you away from the beginners, the amateurs, the 95% losers… and get you on the right path to long-term profits.
You’re going to kick yourself if you don’t already know this, and you are going to kick yourself even harder if you know this and ARE NOT IMPLEMENTING IT NOW…
The problem is that you can enter trades but feel like you either take profit way too early and you regret exiting… This is normal for amateurs as they see the market continue.
Or you let the profit level or take profit order close you out.
Wait… Why is that a bad thing?
Because you have told the market when YOU want to exit. Instead, you could let the market tell YOU when you should be taken out.
The difference here is that by simply letting the market dictate when to exit, your profit potential is unlimited with zero extra effort from you and your trading plan.
How many times have you exited a trade at a take profit level and the market continued to rise higher and higher? I bet it happens a lot… So let’s lose this bad habit.
Ready to kick yourself?
The solution is to simply start using trailing stop losses, or manually move your stop loss in the direction of the trade.
Now, this is nothing groundbreaking but the amount of amateurs who don’t do this is staggering, and they wonder why they can’t make money.
BENJAMIN GRAHAM
“The essence of investment management is the management of risks, not the management of returns.”
Traders are too eager to take a profit and set an imaginable ceiling that is in fact LIMITING their profit potential.
It is shocking when we get emails and messages about how amateurs trade and then blame a system, the timing or anything else they can lay the blame on.
They do all the effort and then they set a target to take profit from Mr. Market, it either reaches this level or it doesn’t. Simple.
Get out of this view.
You want to become a better forex trader? Want to do exactly what professionals do?
Then stop setting a ceiling on your forex trading and start letting your trades ride for as long as possible.
Again, zero effort required yet you can reduce your risk by locking in profit and potentially double, triple or even 10X your profits.
TRAILING STOP LOSS: HOW IT WORKS
As professional traders, the idea isn’t about how often we can trade to generate a return.
The idea is to generate as much profit as possible from each trade.
Imagine mining for gold, you know you’ll find some and you say you want to mine say 100,000 oz… However, you have no idea how much gold deposit is below…
There could be 50,000oz or there could be 1,000,000,000oz.
We can bet you wouldn’t walk away until that gold depository was depleted, right?
That’s the same with the markets… Why set a target when the market can take your trade on for as long as possible.
Instead of setting a simple stop-loss level and a take profit level You can either do this in two ways:
1) Automated – Some terminals offer automated trailing stop loss which you pre-set the number of pips the stop loss will move towards the price to lock in profit as the trade continues.
2) Manual – This is where you set price alerts and manually move the stop loss. This is beneficial as it gives you slightly more room to work with the stop-loss and you can reevaluate the trade every time.
TRAILING STOP LOSS: HOW TO CALCULATE
The first thing you must know before entering any trade is your risk size. Now you have two options, either:
Move your trailing stop loss the same risk size following the profit. E.g) Risking 10 pips and moving the stop loss in 10 pip increments. This way you keep the same risk as you lock in-profit, making the first incremental at your breakeven point/trade entry level.
Or
You can set your standard risk parameter, but instead of moving the stop loss in the same risk increments, you can decrease the risk straight away and choose a different amount of pips to lock in.
Example) your normal stop loss is 50 pips, but once the market has moved in your favour you want to trail the market by 25 pips, which is a 50% reduction in risk.
PRO TIP
To determine how much the price may go up or down in the timeframe you trade in can be achieved by the Average True Range indicator. You can use this figure to determine an appropriate trailing stop loss.
TRAILING STOP LOSS RISKS
Of course, the risks are that you may get stopped out too early. The quick fix behind that is to increase the pip range if you feel comfortable in doing so.
Example, if you have a standard risk of 10 pips and you trail the profitable trade by 5 pips – then you may want to increase it to 7-10 pips.
EXAMPLE: TAKE PROFIT LEVEL
In this example, you can see the standard set up of the candlestick trade and where you would have set your take profit. You risk 10 pips and made 10 pips profit.
EXAMPLE: TRAILING STOP LOSS Same Trade. Same Effort. Same Analysis.
500% More Return.
In this example, you can see how easily this simple technique can be applied and how powerful it can be. By trailing the stop loss, this trade managed to generate 500% more than the other example.
It’s a painfully simple technique, but amateurs just want to get out of the trade ASAP and in profit. This is the reason why they fail. Below are the key reasons why this method is better:
- Increases profits over time
- Reduces risk
- Same effort, more rewards
- Don’t put a ceiling on their own research.
- They don’t second guess the market.
- Strike rate doesn’t have to be high. Can still be profitable at 10% accuracy.