Once you acquire the knowledge on running your profits, you’ll master one of the main aspects of trading. You won’t be able to draw a risk-management plan unless you’re ready to run the profits successfully. You may not achieve relative gains worth a substantial amount but be capable of cutting your risks effectively. Under such circumstances, it becomes tough for you to earn a net profit and push through the trading adversities.
Using the ratio of risk to reward
It’s always necessary for a trader to maintain the risk-reward ratio to a minimum of 1:1 or as much higher as possible. However, a much higher winning ratio depicts a situation that enables a trader to use a lower ratio than 1:1.
You don’t need to pull in extreme measures in your attempt to run profits. This is what you ought to keep in mind while trading for short periods. Don’t forget that with all other factors remaining fixed the overall win ratio gets lower when the profits run further.
Controlling open trades actively
Managing the open trades is one good way out for targeting profits realistically and coping with the element of probability. The nature of the trading plans helps determine the targeted gain, stop loss, and trade entry. This is a usual approach that varies from non-management of trades.
You may utilize some methods for managing the open trades actively. It includes scaling-out as well as stop-loss trailing.
Moving stop losses
Stop-loss trailing is about driving the stop-loss of the initial period to a new point once you achieve a preset profit level. This is meant to lower the lock-in gains and lower the loss expectancy when your position pursues extra profit.
Stop losses shouldn’t go against the trading direction; it has to be aligned positively. Once an extended position opens, the stop losses should pull the prices up to capture gains and not to affect prices negatively in their attempt to turn the position more stretchable. In doing so, you may even expose yourself to more significant losses.
The trade entry level often achieves a break-even point through the initial stop-loss move following a specific accumulation of profit. The trade gets unpredictable when you assume some positions randomly for stop-loss trailing. It’s certainly not a favorable trading idea.
Moving a stop loss turns easier while taking this approach:
When you witness progressive pricing in favor of the trade, you may protect gains and realize profits by progressive closing or scaling out of portions belonging to some open position. You must choose a specific price level based on your trading strategy for entering a full trade. This is quite essential for scaling out.
Portions of that position may be closed for returns at much higher profit segments (levels) just to keep your profits locked in. Two or three levels of profit may not be adequate for using this strategy. Scaling-out comes with a negative aspect in that it can leave an impact on your entire profit while you assume it to fetch only a single take-profit level for the overall position.