Stop loss and Take profit

You'll learn

  1. How to understand that stop loss and take profit rules are part of an effective risk management strategy.
  2. How to assess if you prefer aggressive or conservative stop losses based on your risk tolerance.
  3. How to plan stop loss and take profit levels in advance of entering a trade.
  4. How to consider potential roadblocks when setting the take profit level.
  5. How to trust the process and remain patient in following stop loss and take profit rules

Once you learn this, you will

  1. Effectively control your risk
  2. Protect your capital
  3. reduce emotional biases
  4. Maximise the profits of your trades
  5. Maintain consistency in your trading results
  6. Have a worry-free trading plan.

Step 1: Where do we get in ?

  • Long trade (inverted head and shoulders): Just above the high of the entry candle.
  • Short trade (standard head and shoulders): Just below the low of the entry candle.

Draw a line here and call it "entry"

Step 2: Determine the spread

Note to self: Also check market depth for stuff like lite-coin.

The spread is the distance between the bid and ask prices of the instrument..

Step 3: take profit

take profit distance from entry = PCL - entry - spread - 1 pip

  1. If you spread is 3 pips, place the TP 4 pips short of the PCL.
  2. If spread is 1.5 pips, put TP 2.5 pips short of PCL.
  3. If there's a strong S&R level very close, and just short of your TP, move you TP short of that line. Make sure risk to reward is still > 1:1

Step 4: stop loss

  1. Conservative: Above the head
  2. More aggressive: above the right shoulder
  3. Super aggressive: above the setup candle

Risk to Reward must always be better than 1:1.

Step 5: Risky business

You must have a positive risk to reward. (Better than 1:1).

This may mean that the conservative stop loss is not available. You need to decide to either skip the trade, or choose a more aggressive stop loss.

Measuring ratio

risk = entry - sl
reward = tp - entry
ratio = reward / risk

ratio must be >= 1

The more aggressive patterns are more profitable, but more psychologically challenging.

Holistic Picture

SL and TP is the final step before triggering the trade.

Planning your exit is essential to ensure you consistently trade with sensible levels of risk and take profit levels to ensure you have long term sustainability as a profitable trader.

Some challenges you may face

  1. Price hits SL, then goes to profit - can be very annoying
  2. Don't make emotional attachments to your trades. Be logical.
  3. You may have a learning curve in setting your TP based on PPA and S&R and attraction lines.
  4. Setting realistic TP targets can be another struggle. Don't worry about missing out, as long as you're making better than 1:1 risk to reward
  5. Don't be overconfident, impatient, nor second-guess your decisions.
  6. You are allowed to change between the three SL styles (conservative to super aggressive).