The Question of Moving Up Stops

Filed under: Learn Forex Trading |

The live trade on the GBP/USD pair today really rammed home the importance of moving up stop losses when a trade moves into profits, and I would thus like to talk about this issue in a little more detail today.

 

Screen shot 2013-08-08 at 17.05.31The question of moving up stop losses is a tricky one. This is because if you move your stop losses up too quickly, then you will have a lot of breakeven trade results, as well as a number of losses, and perhaps just a few winners. This could effectively turn a winning methodology into a losing one, and wipe out your edge completely. However, it is important to move up stops if you can, as protecting what you have is an important part of trading. For example, if your trade moves into profits of two times your risk, then it makes sense to move your stop loss up to breakeven to protect your capital.

 

The real key to moving up stop losses is allowing the market room to move, so to speak. If you make your stop losses too tight, then the natural ebb and flow of the market will likely take it out. As your trades move more and more into profit, you can manually trail your stop loss, but all the while keeping those stop losses a good distance away. Then, if the market turns around, at least you will have locked in some of those profits. You could see your trades as a continuous risk-reward scenario. For example, when you put the trade on, you have a risk-reward ratio of 1:4 (risking $100). But as the trade moves into three times your risk in profit, you are then risking $400 just for $100 more of profits. This is not a good risk reward scenario. Thus, you could move your stop loss and lock in $200 profit, and risk losing $100 for an additional $100 profit.

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