Have you ever been in a trade that has gone to within a few pips of your profit target and then reversed all the way back down and hit your stop loss?
Not a pleasant experience at all!
But fortunately if you use this simple technique it’s not one that you will have to suffer though any more.
Keep your risk reward to at least 1:1 though-out the trade
As your trade goes for you, your risk/reward is constantly changing.
For example if you enter into a trade with a 30 pip stop-loss and a 90 pip profit target, you would have a risk/reward ratio of 1:3. As the trade goes for you this changes very quickly. If you have a 30 pip profit, your risk/reward has all of a sudden become 1:1.
As you get to within 10 pips of your profit target, your risk/reward is now 12:1. You have only 10 pips to gain, but you can potentially lose 120.
So to avoid this scenario what you can do is tighten the stop-loss as it gets closer to the profit target so you have no worse than a 1:1 risk/reward on at any point during the trade
If your profit target is 10 pips away, trail your stop loss to 10 pips away. If your profit target is 20 pips away then move your stop-loss to behind the market.
Use your discretion
Using this rule in all circumstances might not be the best thing. There is no point getting stopped out on a big winning trade because the risk/reward ratio has dipped by 1:1. So watch what’s in-front of you and use your discretion.
But it is particularly useful once the price gets close to your target, so keep it handy in your toolbox of exit rules.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).
This post was first published here.