Do you have experiences where you got stopped out in a strings of trades? I do. Even they may be small losses, they do ultimately add up. Theoretically, if you get stopped out because you followed your trade plan, you are being disciplined. It's better than moving stop loss and stay in a losing trade, right? Well, that's true. The problem is from my experiences all those stopped out trades could be avoided or at least be alleviated. How is that possible you may ask. Well, we are going to take advantage of the fact that price movement tends to fluctuate a lot except in the case of extreme momentum move to one side.
Cut down losses to the minimum
- Active monitoring and management of trade positions
- Discipline to exit trades manually
How this system work?
1. For example, you have decided that your stop loss is going to be 20 pips. This shall be your mental stop loss (at -ve 20 pips)
2. However in the actual trade, you will put a fairly larger stop loss, say -ve 40 pips.
3. Monitor the trade when it gets triggered. The moment the trade goes against you, and hit the mental threshold of -ve 20 pips or more, you may consider treating this as a bad trade. Watch and wait for the price to pullback a bit in your trade's favor. Chances are you will get to -ve 10 pips or less. Sometimes, you can even get to breakeven or even get a small profit. Usually, I will exit a bad trade with a few pip's small loss, if I feel that the momentum against my desired trade direction is very strong.
4. The worst case scenario is that you get hit with the bigger stop loss. From my experiences it doesn't happen that often. The amount of money I saved from my active manual stop loss management is worth the risk.
5. If you follow this system, your risk-reward ratio will improve drastically.