One of the first things you’ll here when it comes to successful trading is sticking to your stops. While this is great advice, there is another part to the equation for profitable trading: Sticking to your profit targets.
Stops and Profit Targets?
In short, once a trade is entered, its advisable to put a stop loss and profit target in place. The stop is there to get you out of a trade when you are wrong (taking a loss) and the profit target will get you out at a profit in case of a win (taking profits). Your strategy should guide you on how to manage both.
Note: There are different stop loss types and many ways to take and manage profits, but that’s for another post.
Why are Sticking to Profits Targets just as Important as Sticking to Stops?
It is important because your winning trades must cover your losing trades, plus leave enough over to make you profitable overall. And make no mistake, you will have losses, because there’s no such thing as a strategy with a 100% win rate. So even if your strategy has a 99% win rate, it will still take losses.
An Example:
For simplicity sake, let’s say you have a win rate of 50%, which means over time you lose half and win half your trades.
This means that if you have a reward to risk ratio of 1:1, you will be breaking even (excluding trading costs). It also means that if your reward to risk is higher than 1:1 you will be profitable overall. And if your reward to risk is smaller than 1:1 you’ll be losing.
So if your strategy requires a reward to risk ratio that is higher than 1:1 to make money, but you don’t stick to your profit targets, you won’t be profitable.
Why is it so Hard?
It’s hard because real money is involved…. and money means that dreams are on the line. It’s not easy to sit on unrealized profits, knowing that a trade can turn on you at any time.
It gets even harder:
- after you’ve taken a couple of losses in a row.
- when you’ve got a big position going on (taking big risk).
- when you are trading with “scared money”.
- when you lack discipline and patience.
- when you trade without a plan.
Finally:
Sticking to profit targets are so much easier said than done. There so many lies you can tell yourself as to why you should take profits early, but given enough time you’ll come to realize that it is the right thing to do.
Thanks so much for reading. I hope trading is treating your well.
Thanks and Regards,
Trading SOS SOS