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Becoming a Better Trader – Setting Stops, Targets, and Tying in Risk Management

Becoming a Better Trader – Setting Stops, Targets, and Tying in Risk Management

One of the common issues traders face is deciding on where to set their stop-loss, target(s), and how the two of these come together to determine the risk/reward profile of a trade and why having a robust risk/reward strategy is so important over the long-haul.

Whether you are a new trader building a foundation or an experienced trader struggling (happens to the best), here are 4 ideas to help you Build Confidence in Trading

Stops and targets should be based on your analysis and not on arbitrary rules that don’t dynamically change with the market in question or volatility regime. Using a fixed stop-loss amount (i.e. 20, 50, 100 pips, and so on) doesn’t take into consideration the technical landscape. For example, if you are getting into a trade based on support then you should use that to determine the invalidation point of your idea and set your stop accordingly. If placing the stop sufficiently below support means it needs to be say, for example, 75 pips away, then so be it. Having a stop set too close to your entry and not beyond a logical invalidation point is a certain way to get chopped up on some solid trade ideas that would have worked out.

From the point of entry and where to place your stop one needs to make sure the trade has sufficient room to run to make your risk worth your time. Again, based on your analysis – Does the trade have a reasonable chance to run to a particular target that will asymmetrically skew risk in your favor? Risk/reward profiles of around 2:1 or better are considered robust. You may have a scaling strategy where there are several targets, which is an excellent way to exit a trade, but you need to make sure that on average those exits collectively are equating to a strong risk/reward profile.

The Becoming a Better Trader series in one location, check it out.

When it comes to how much to risk per trade, this as we discuss often, is best based on a percentage of your capital; from there you adjust your trading size accordingly. For example, if one trade required a 50 pip stop and another 100 pips, then to risk say 1% of your capital it would require that the 100 pip trade be with half the position size as the 50 pip trade. By operating with this mindset you are more likely to keep results consistent.

For the full conversation and set of examples, please check out the video above…

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

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