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Avoiding Taking Profits Prematurely

Avoiding Taking Profits Prematurely

Richard Krivo, Trading Instructor

Instructor's Response:

Nice job on employing Moving Averages to take this trade in the direction of the trend on this Daily chart of the USDJPY. You demonstrate a good understanding of this concept.

Since your stop is only 40 pips in each case but the limit you have set is providing many times that amount in terms of profit, the Risk Reward Ratios you have in place (1:9 and 1:7.5 respectively) are very strong. For the record, we look for at least a 1:2 RRR on every trade.

In this case, this USDJPY continued to move to the downside so I can understand why you asked about taking profits too soon. A plan that a trader can employ to take advantage of an ongoing move without having their entire position at risk is to trade multiple lots and scale out of the position.

For example, let's say that you opened 3 lots on each of these trades. As soon as the trade reached the 1:2 RRR, in this case +80 pips, one lot could be closed out and the stop could be moved to your initial point of entry...a breakeven stop.

As the pair progressed, another lot could be closed at the 1:3 RRR this case that would be +120 pips. (3 x 40 pip initial stop = 120 pips) On the last lot the stop could be trailed at a respectable distance, let's say a hundred pips or so, to capitalize on any additional profit should the pair continue to move in your favor.

Chart 11 13 09

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.