Could Your Trade Management & Stop Loss Be Killing Your Profits?
Without a doubt trade management is one of the most important aspects of becoming a profitable day trader. Most have the ability to enter the market logically, and have a sound reason or criteria they consistently follow to do so. With that being said, what happens after a trade is entered is often what separates those who produce consistent profits from the vast majority who continually struggle, and not the entry. While all trading strategies will require slightly different trade management, there are common denominators that will effect all no matter their personal day trading strategy. Through this article we will break down several points all can put into practice to optimize their trading.
Following The Banks…
Hands down the most important aspect of trade management is stop loss location. Stop losses should always be determined long before entering the trade as they can and often do determine whether or not a trade will end up in the red or in the black. Because this is such a critical step, simply using an arbitrary number for each stop such as 20 or 30 pips is not a ‘stop loss strategy’ that I would recommend.
In order to have a logical stop placement it needs to be located where, if it was hit, the original trade setup would no longer be valid. Many struggling traders will repeatedly have their stop hit by only a few pips only to see the market turn and run in the expected direction. This can be avoided with the correct stop loss location! Like everything else we do and teach here Day Trading Forex Live, we believe stop placement should be simple. When something is simple it is repeatable, and repeatability is the only way to achieve long term consistency.
Much like our entry strategy we let the banks give us the indication of where our stops should be located. Before the market begins to make its trend for the day we typically see a stop run or manipulation move created first. If your new to the site and do not understand why the happens please watch this ‘3 Part Mini Forex Training Course‘ first. The manipulation is not only our key for taking entries, but it also tells us where our stop loss should be located. Below is a video that details stop loss placement more in depth.
During every 24 hour trading day the forex market goes through 3 separate sessions. It is important to understand how these sessions can and do effect your open trades. Being aware of when a new session is set to begin is extremely critical, and even more so for those who trade the European/London session. Lets see why…
One of the most important functions of the banking industry is the processing of what we term as general order flow. General order flow are orders to simply exchange one currency for another. This is done for any company that sells goods around the world to nations using different currencies other than their own. Unlike speculative trading, this is done for the simple purpose of exchanging money rather than trying to make money on currency price fluctuations. Much of this volume is processed in the first 3 hours of each trading session. Because of this, carrying a trade from one session to the next can be hazardous, especially if no action is taken.
In order to fully understand this we must also understand how the banks enter positions. Said as simply as possible…for every buyer there is a seller, and for every seller there is a buyer. Because banks enter such large positions they must create buyers when they want to sell, and they must create sellers when they want to buy. This is done by a quick push down before they buy the market, or a quick push up before they begin selling the market. One way banks can create this manipulation is by pushing through all the general order flow in order to create a false push or stop run. Just as quickly they will reverse the price in their intended direction. This is an extremely basic overview but it illustrates how the first 3 hours of especially the European and US can be riddled with traps most traders will never recognize!
Lets assume you went long at 5AM Eastern and coming into the 8AM open you are only 10 pips in profit. Even if the NY session is going to produce the up trend you’re looking for, what do banks do before trending the price? More often than not they create the stop run or manipulation the opposite direction as discussed above. Therefore you may have the direction right, but due to the banks in the next session creating the manipulation before beginning the trend, you can easily be stopped out with the manipulation before the price runs in your direction.
Simply put if you carry a trade from one session to the next then you are subject to the next sessions manipulation. To protect yourself from this you can do one of two things. Close the trade before going into the next session, or move the stop loss to break even when the next session begins. More often than not protecting yourself by closing or moving the stop to break is the best choice. Unfortunately most traders have no idea when this manipulation occurs and thus end up being a victim, rather than capitalizing on these moves.
Asian Session – 5:00PM – 2:00AM Eastern
European Session – 2:00AM – 12:00PM Eastern
NY Session – 8:00AM – 5:00PM Eastern
Using Risk/Reward For Trade Management
If you have been around the site for any length of time you know how we value a proper risk to reward ratio. In over 8 years of trading literally every single profitable trader that I know maintains a positive risk/reward ratio of 1.5 to 1 or higher. If your struggling to produce consistent profits look at your overall risk/reward ratio. More than likely you will have a negative risk/reward. Often traders still working towards profitability struggle greatly with trade management because there is so much discretion involved. One of the greatest ways to take this discretion out is by simply using a risk/reward take profit. This eliminates the lack of consistency many aspiring traders struggle with. It also allows you to win 50% of the time or less and still make money. Obviously the goal is to maintain a better win/loss ratio than 50%, but this allows for a worst case scenario in which you will still turn a profit.
There is always a balance between getting the most from a successful trading and being greedy only to watch a profitable trade come back and stop you out at break even. Finding a good balance can be achieved by using risk/reward as your take profit. Doing so will not only take the emotion out of the decision making process but it will also allow you to pull through a series of losses rapidly which is huge from a psychological standpoint. As a general rule of thumb the vast majority of my trades are set with a R/R of 2/1. This allows me to win only 35% of the time and still be slightly above break even. Why not give this simple day trading tips a try for a month or two and see how it effect your overall bottom line?
What we have discussed here is time tested and proven techniques you can use to improve your trading overall. Obviously trade management is a much larger and far more detailed subject than what we have laid out here in this training article, but putting these basic techniques to use will have a positive impact on your existing trade plan for managing trades. If you would like daily support and a complete trading plan you can check out our advanced forex bank trading course which includes our access to our live forex room, daily market reviews, and member community forum. As always if you have any questions feel free to shoot us an email and we will be happy to get back with you.
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