Becoming a Better Trader: Q&A Session

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Today was one of our routinely-scheduled Q&S sessions where we delved into a host of topics pertaining to trader performance.

There were a few attendees who expressed that they tend to get stopped out of trades too often only to watch them move towards their profit objective. This is a common issue traders face, and it really boils down to one thing – using logical stop losses. What does that mean? It means using the analysis which got you into the trade to get you out by placing your stop at a point where you are proven wrong. For example, perhaps you entered after a currency pair hit support and started to bounce. Placing your stop under the most recent low is a logical place to put it. By saying I only want to risk X number of pips isn’t logical and will likely fall ahead of the support level you used to get you into the trade in the first place. Traders often do to this to avoid losses which stems from having on a position which is too big. You should know how much risk you want to take on a trade before placing it and then adjust your size to a point which matches the distance to your logical stop.

Another trader asked about risk/reward and whether a 1:1 ratio is sufficient. The problem with a 1:1 risk/reward ratio is that it forces you to be right a lot more than you are wrong in order to make the math work between win/loss percentage and gains/losses per trade. By identifying trades which have asymmetrical risk profiles (i.e. 1:2) you alleviate the pressure of having to be right so much. A trader could be profitable far less than 50% of the time and still come out ahead with higher risk/reward ratios. Now, if you use a scaling strategy that is another story. For example, you enter the market long 3 lots and then decide to sell 1 lot at 1:1, sell another lot at 1:2, and then let the 3rd lot run with a trailing stop for a much larger gain. This is a common strategy used among experienced traders. But to enter a position with your objective only 1x your risk is going to force you to be right a lot more than you are wrong.

For the full conversation, please see the video above…

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---Written by Paul Robinson, Market Analyst

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