Trading Academy

Lesson 40

Managing Stop-Loss and Take-Profit

The whole idea behind managing your stop-loss and take-profit is to follow the key advice of cutting losing positions quickly and letting winning positions run. This of course goes against the natural human tendency to hold on to losses and take profits early. 

Overall, traders who exit a trade on emotion typically take much smaller profits, while traders who exit a trade based on logic and discipline are very happy with the profits they make.

Stop-loss orders are crucial to trading survival. They prevent you from losing more than a predetermined amount of your capital by closing out an open position that moves against you. However, it’s not necessary for a triggered stop-loss to end in a loss for you. And that happens when you adjust your order levels after you’ve entered a position and the market has already moved away from your entry price. At this point, you may decide to move your stop-loss from its original level to lock in some of the gains. This way, if it is triggered, you’ll actually be making a profit.

The best way to approach managing the stop loss and take profit orders is, first of all, to have set them from the beginning and then stick to them. You should only touch them at a point when you want to move the stop to lock in profits as the market moves in your favor.

Let’s see how this can unfold: 

This example shows a long NZD/USD trade based on the 61.8% Fibonacci retracement, with an entry on the level and initial stop loss below 76.4%.  

Phase 1: Price takes off and when it reaches a mild horizontal resistance level (point 2) we decide to take 1/3 of the trade-off and move our stop loss to breakeven (point b). 

Phase 2: Price continues to rise and it reaches another level of horizontal resistance, at which point we can take another third of our position off, and raise our stop-loss to lock in more profit (point c). 

Phase 3: At this point, we have already taken profit twice and we have locked in additional profit with our stop-loss. We can consider anything beyond this as a bonus, and as we can see in this example, the market does reward our discipline and patience with even more profits.

Keep in mind: there is no perfect way to manage your Stop Loss and Take Profit. Eventually, they will get hit, but the point is to give the market room to breathe while at the same time locking in profit as it moves in your favor.

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