When we enter any trade, we have two basic goals:
1. Obtain the maximum amount of profit
2. Protect ourselves from losses
It starts from the beginning . Look for the most profitable opportunities in the market, as opposed to a series of weak trades just for the sake of trading. This and this alone should be a prerequisite for any trade. It avoids taking trades that offer weak payouts and keeps your risk/reward at a desirable level.
Stop losses and profit targets work hand in hand due to risk/reward. Both should be dynamic, and work off of one another in terms of value. For instance, if I identify a trade with a profit target of 150 pips, I know that I will be willing to risk no more than 50 pips in order to fit within the bounds of 1:3 risk/reward. In many cases, however, 50 pips isn’t needed for me to tell whether or not the trade I am taking is going as planned, and I will close it before then if I see signs of it clearly moving against me. My article on stop losses explains this in further detail.
Alternatively, if I identify a trade with a profit target of 50 pips, I know that I am willing to risk only -17 pips in order to fit within the bounds of 1:3 risk/reward, or -25 pips to fit within the bounds of 1:2 risk/ reward.
Some might argue that the distance of the profit target assumes more risk, as it is harder to get 150 pips out of a trade versus 50. But by developing a consistent approach in regards to general profit target marks (appx 150 or so, or whatever the case might be), the math works out over time if this mark is consistently achieved. The trader’s history alone can determine this.
Both profit targets and stop losses should be dynamic based on surrounding support and resistance levels, or other market factors. In the following articles, I’ll explain in deeper detail, methods for doing so.