by Boris Schlossberg and Kathy Lien

Repeat: Protect your profits. Protect your profits. Protect your profits. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse a short while later and take out your stop 40 points lower. If you haven't already experienced this feeling firsthand, consider yourself lucky - it's a woe most traders face more often than you can imagine and is a perfect example of poor money management.

Managing Your Capital
The FX markets can move fast, with gains turning into losses in a matter of minutes, making it critical to properly manage your capital. One of the cardinal rules of trading is to protect your profits - even if it means banking only 15 pips at a time. To some, 15 pips may seem like chump change; but if you take 10 trades 15 pips at a time, that adds up to a respectable 150 points of profits. Sure, this approach may seem like trading like penny-pinching grandmothers, but the main point of trading is to minimize your losses and, along with that, to make money as often as possible.

The bottom line is that this is your money. Even if it is money that you are willing to lose, commonly referred to as risk capital, you need to look at it as "you versus the market". Like a soldier on the battlefield, you need to protect yourself first and foremost.

There are two easy ways to never let a winner turn into a loser. The first method is to trail your stop. The second is a derivative of the first, which is to trade more than one lot.

Trailing Your Stops
Trailing stops requires work but is probably one of the best ways to lock in profits. The key to trailing stops is to set a near-term profit target. For example, if your "near-term target" is 15 pips, then as soon as you are 15 pips in the money, move your stop to breakeven. If it moves lower and takes out your stop, that is fine, since you can consider your trade a scratch and you end up with no profits or losses. If it moves higher, with each 5-pip increment you boost up your stop from breakeven by 5 pips, slowly cashing in gains. Just imagine it like a blackjack game, where every time you take in $100, you move $25 to your "do not touch" pile. (For more on this, see Trailing Stop Techniques.)




Trading In Lots
The second method of locking in gains involves trading more than one lot. If you trade two lots, for example, you can have two separate profit targets. The first target would be placed at a more conservative level, closer to your entry price, say 15 or 20 pips, while the second lot is much further away, through which you are looking to bank a much larger reward-to-risk ratio. Once the first target level is reached, you would move your stop to breakeven, which in essence embodies the first rule: "Never let a winner turn into a loser".

Of course, 15 pips is hardly a rule written in stone. How much profit you bank and by how much you trail the stop is dependent upon your trading style and the time frame in which you choose to trade. Longer term traders may want to use a wider first target such as 50 or 100 pips , while shorter term traders may prefer to use the 15-pip target. Managing each individual trade is always more art than science. However, trading in general still requires putting your money at risk, so we encourage you to think in terms of protecting profits first and swinging for the fences second. Successful trading is simply the art of accumulating more winners than stops.


Next: Forex Trading Rules: Logic Wins; Impulse Kills »



comments powered by Disqus
Trading Center