There is nothing worse than seeing one of your trades up by 40 pips one minute only to see it reverse shortly after and hit the stop loss 50 pips lower. This type of experience is unfortunately very common among traders in the notoriously volatile currency markets, but it’s not inevitable by any means – it’s simply a matter of how well you manage your money.
Money Management
The forex market is a fast-moving one, and gains can turn into losses in the blink of an eye. This means that you have to be extra-diligent when it comes to managing your money. One of the most effective strategies towards this end is to protect your profits, even if you only bank 20 pips at a time. Now 20 pips might not seem like a lot, but if you had 10 profitable trades in a row of this size, it would add up to an altogether more respectable 200 pips of profits. Although this may seem like a miserly strategy, it chimes with the goal of minimizing losses and making money as often as possible.
At the end of the day, it’s your money you’re risking. Even if you are prepared to write it off as “risk capital” – i.e. money that you are willing to lose – you need to view your position in relation to the market in adversarial terms – and as in any conflict, you need to look after yourself as the highest priority.
There are a couple of strategies that can be easily applied to your trades in order to prevent winners from turning into losers: using trailing stops, and trading more than one lot.
Trailing Your Stops
This takes a bit of effort, but it is one of the most effective methods for protecting profits. In order to use them to this end, you need to set a near-term profit target. For instance, if this target is 15 pips, then as soon as you are 15 pips in profits, move the stop to the break-even point. Then, if it moves lower and hits the stop, you haven’t lost any money. If it goes higher, you can move your stop up from break-even by a similar amount to lock in profits.
Trading In Lots
If you trade more than one lot, you can set more than one profit target. So, if you traded two lots, you could have one profit target at a conservative level, say around 15 to 20 pips above your entry price, and a second one much higher, at which point you would bank a much higher risk/reward ratio. Once the first target level is reached, you could move the stop to break-even in the manner we described in the previous paragraph.
There are no hard and fast rules for how to do this – and it might be that you need to use larger amounts to suit your trading style and the time-frames you are trading. A long-term trader might prefer a wider first target such as 100 pips, while short-term traders might be better off with a more modest 15-20 pip target. It’s not an exact science, but by introducing a profit-protection methodology to your trades, you can accumulate more winners than losers, and ultimately succeed over the longer term.
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