December 23, 2020 | AtoZ Markets – It is extremely common for traders to try to gain control over the trading process by adopting targets for just about every variable. Though this could become productive, it is possible to be too rigid while trading forex.
Number of Trades
Typically, traders think they will cease trading after winning or losing a specific number of trades per day. Even if this makes sense or not depends massively on the type of trading undertaken. For scalping o short-term trading, this is all just a psychological defense mechanism that might limit an effective trader’s profitability. But for swing or long-term traders, this rule is helpful – because if the first two or three set-ups fail immediately, a winning set-up becomes increasingly unlikely to form. Also, when losing trades happen at the same price area, it might not be a fruitful area very soon.
Psychological devices could protect against catastrophic losses, even if they are not statistically valid. Also, when traders’ nerves are hit from losing several trades consecutively, it might be a good idea for them to take a break from trading, at least for the rest of the session, until they recover psychologically.
Traders often say that they use fixed stop losses of X number of pips, sometimes differentially defined between currency pairs, sometimes not. Even if there is a chance this would work, it is still a mistake as stop losses must be determined by either technical measurements or volatility. For scalpers using too tight stop losses, this might not matter that much. However, for long-term traders, it becomes more crucial to get stop losses right.
Somehow, fixed profit targets make sense because a proper trading method must produce a specific number of winning trades over time. The crucial part is for the profit targets to be neither too small nor too big – somewhere in the region of double or triple the trade risk is typically a good thumb rule. Still, it makes more sense to follow the rhythm of the market, and allow trades that are doing well to continue to run, at least until there are signs of turning.
Aside from that, a productive compromise might be to get profits when they reach targets immediately as moves in forex are usually spikes that quickly retrace – otherwise to impose a trailing stop, but only when the price is near to the target. Also, it makes sense for profit targets to be based on volatility.
Risk per Trade
Plenty of traders have a rule where they risk the same percentage of the account equity on every trade. One thing about this is they risk a little less on trades that seem less promising and more on trades that look more promising, but not by too much. A great rule is to make sure the risk per trade is not so large that they get upset if the trade changes and becomes a loser, but not so small that traders won’t care about what happens.
Think we missed something? Let us know in the comment section below.