How to Keep Your Capital for A Rainy Day
Personally, I’ve never been super keen on setting a profit target for my trades. The main reason being that I like to constantly evaluate how my positions are going and what the market is doing. Of course, as I’ve discussed in previous posts I like to look at potential levels where profits may be taken, but I also like to pay attention to how price reacts at these levels before pulling the trigger and closing a position.
When it comes to stops, however, I’m the exact opposite. Establishing and implementing your stop loss. This is pretty much the most important factor to successful trading. Losses are twice as expensive to make back so absolute ruthlessness is needed in cutting losses quickly.
Although it’s my belief that price patterns repeat themselves, sometimes I will close a position before its stop loss or profit levels. Why? Because experience tells me that when prices isn’t acting like it should then I’m happy to exit the position immediately and wait for the next setup.
See, by studying price action, we are able to realise and understand the importance of trading the evidence, rather than the expectations. All too often, new traders are expecting price movements before it is complete, acting on pure gut instinct. And in the end, it costs them their capital. Instead, simply waiting for a trade setup to complete will have staggering results on the profitability of your Forex trading account and your emotions.
When a position is unfolding according to my trading plan, then there’s very little you need to do. If it reaches your target area and is still behaving well, then keep hold of it, or at least partials. This is where the big money is made, in letting your winners run.
With this in mind the next general rule is to ensure your risk reward ratio is at least 1:2. When you consider the above about letting winners run, you can really hit it out of the park and end up with some trades that are 1:10 or even larger.
Finally, our last crucial method to keep your capital is to learn to sit and wait. You should be prepared to do absolutely nothing until your trading setup forms. As the legend Jesse Livermore once said, “It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”