- January 18, 2013
- Posted by: CoachShane
- Categories: Basic Trading Strategies, Trading Article
This post is going to cover letting your profits run and just how to accomplish that.
If you trade with price targets, you may be shooting yourself in the foot. How many times have seen price hit your target and then continue traveling in your direction? Of course, the reverse is true where your target is hit and the price pulls back.
Did you know that for many traders, their entire year is made on a handful of trades? Getting involved in a trade that just flies is a great way to increase your account size…..which will increase the amount of contracts traded (if you trade with risk $ as a % of your account) and then keep the circle going.
Of course, nobody knows when the engine that is pushing price has been topped off with gasoline to continue the drive in your direction. That reason alone, the unknowing, may be a great reason to attempt to ride the move as far as possible.
Let’s take a look at a chart example
Shorting opportunity arises on a break of a upward trend line with the convergence of a level showing to be resistance (red arrow). You choose to use a level where price exploded from for your profit target of 126 pips. Nice! Almost a 4:1 reward to risk ratio. Factoring in a $5k account size and 2% risk, you can 3.125 mini lots…rounded down to 3. Your risk is $96 and your profit would be $378. Winning trade!
Now, what if you decided to trail your stop, how can you do it? Use what the market presents in terms of swings or waves. The green lines show where your stop would be moved each time the level where the little red arrows are placed, is broken. You simply look for area the consolidate and move your stop to the high of the consolidating when the level breaks. It is a little subjective but quite mechanical.
How is the return now? For the same $96 risk, you pocket $606 or a 6:1 reward to risk ratio!
You have other options such as scaling out at the profit target and letting the rest ride IF you need to bank profits. The truth is, some feel much better taking partial profits which does reduce your risk exposure in the trade. For others, they are fine with letting the whole position ride but do expect that sometimes, a target would have served them better.
Here we have a pullback to a potential resistance zone (which holds) plus the 78.6% Fib level (yes, that level is pretty good…check it out on your own charts). Small risk of 10 pips. Same account….gives me 10 mini lots to trade!
How does it work out? This time, the target works much better as you get stopped out by a push up that then continues on its way. You make $320 on the trail…….and $1040 on the target on a 10:1 reward to risk ratio!
As you can see, there are some good and bad for both. For my money, using a market structure stop adjustment works better on the higher time frames. The second chart is a 15 minute chart but going out to a 1 hour chart gets you 245 pips while the 4 hour gets you a little less.
You don’t want too small a time frame where you get taken out by a wave up or down. You also don’t want too big a time frame where the structure may take longer to form allowing for a greater reduction in profits.