Trading Forex: A Conservative Approach

Filed under: Learn Forex Trading |

I’ve been thinking a lot about the old trading adage:

 

Never let a winner turn into a loser.

 

Although this statement seems very simple, it actually has many layers of complexity to think about. How exactly do you never let a winner turn into a loser? If you took this literally, you would close every trade as soon as it moved into a profit. This would give you very small profits, and very big losses. You would soon lose your trading capital if you did this. So what are your options?

 

One thing you could do is to use trailing stops. So, when price moves in your favour, your stop losses move up too. However, if you choose to go this route, you might find that you are not giving the market space to breath. Markets do not move up or down in a straight line, and they ebb and flow. Therefore, if you use a trailing stop or move your stops up manually, you might not give the market space to do its thing, and more often that not, your stop loss will be hit.

 

An alternative approach that I like to use is to take 70% of the profits at the 1R level (a level of profit equal to that of your risk), and then let the other 30% run to either the original stop loss or the target. So, if your target is 2R (an area of profit equal to two times your risk), and you take 70% of the profits at the 1R level, then the trade can then have two possible results – a 0.4R profit if it hits the stop loss, or a 1.3R profit if it reaches the target. This is a conservative approach, and one that allows the market to breath and move. It also stops a winner from turning into a loser – and this is exactly what successful traders like to do.

 

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