On too many occasions, I see clients that are making profit, lose their primary investment without protecting their trades correctly.
This can be due to a number of reasons such as, not being able to monitor the trades for a period of time etc. (clients with eToro’s mobile application don’t have this issue)
Traditionally Investors use a stop loss to protect their initial investment if the market turns against them. Basically, it’s the amount they are prepared to speculate in the markets and therefore associated with a negative number.
There is a simple way to capitalize on your profitable trades without forfeiting any of your primary investment.
When your trade moves into profit significantly, then a percentage of your profits can be “locked in” by moving the stop loss into profit (a positive number).
Take the example below. (The spreads have been omitted, to keep things simple)
- Investor opens a Short (sell) position is opened at 1.3433
- Take profit is 100 pips = 1.3333
- Stop loss is 100 pips = 1.3533
- After a period of time the investor moves his stop loss into profit at 1.3383 (8/2/13 @ 17:30)
- From this point onward s the investor can’t lose any of his initial investment
- He will make a minimum profit of 50 pips at a price 1.3383
A few simple rules to follow:
- Make your trend analysis and decide the direction & duration of the trade
- Wait for the Investment to move into a significant profit
- Decide on the amount to protect
- Avoid placing the stop loss too close to the current market price to allow for reasonable retracements in the market.
- Don’t double guess yourself and move your stop loss back into a negative number.
- If the trend continues in your direction continue to move your stop loss into a bigger positive number (A manual trailing stop)
- If the trend continues to move in the correct direction also move your “take profit” out so you lock in further potential profits.
Trading takes time, patience and discipline please don’t hesitate to contact me on the openbook to answer any questions you may have. SteveHu