…OR in any other trade, for that matter, is the exit. There are actually two points – the loss-taking exit and the profit-taking exit. This post is about the former.
The most dangerous point in a trade is right after the buy or sell button is clicked…
There is no profit cushion, so price, able to do whatever it wants, can immediately go towards the loss. In short, this is the point of maximum adversity. If there is a stop loss, the maximum adversity is usually capped. (There are times where markets will gap across stops, or where you will get bad fills, but especially in the forex market, this is relatively rare.)
Personally, I am NOT interested in forex trades that hit my full stop.
A client of mine was studying my profit and loss statement for the month. This client himself works for a broker, so he knows very well what to look for. The very first thing he remarked on was the TINY size of my losses. How does this happen? The key is risk.
I am constantly assessing the risk of momentum re-entering the market against me. I trade so that trend, cyclicity, time, momentum and support/resistance are in my favour. If momentum turns, I have lost one of the most crucial edges in the trade, and I am out. The risk has become unacceptable. If this happens, it is usually at a quarter to a third of the original amount risked.
Think about this – most stop losses are based on theories of support and resistance. That’s an edge. But momentum is also an edge. If price charges support or resistance with momentum, they may easily be broken, however briefly. It is far better to get out and pace the movements of momentum again.
MAKE NO MISTAKE>>>THIS AFFECTS YOUR BOTTOM LINE.
Imagine you take two losing trades for every three winning trades. That’s a win rate of 60% – acceptable. So much energy goes into increasing that win rate to 70 or 80% (usually unsustainably) that traders forget that if they can DECREASE the losses, they will have increased their profits automatically!
Now imagine if your losing trades were halved in size. Suddenly, there is much more in the bank. Imagine your trading capital to be a vault, battered by these intruding losing trades. By reducing their power, you have automatically improved your situation. Simple, don’t you think?
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
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