1. Trade Using Multiple Objectives
It may seem obvious; but the best thing for you to do in your trading to improve profit is to actually take profit. There are too many traders who are so happy to see their position in the green that they will sit on it as emotion crowds out rational thinking to the point where the hope of a ‘homerun’ leads them to give back most – if not all – of their gains. Then there is the trader on the opposite end of the spectrum. They are so nervous that a modest profit will turn into a loss that they quickly cut and run before the trade can really start to stgelop.
How do you extricate the emotion from your trading? To fully rid yourself of feeling is impossible and would undoubtedly lead to new problems. However, there is something very easy you can do to ease the burden: trade with multiple objectives. The basic trade entails an entry based upon some strategy, a stop that limits risk to a reasonable level and an objective that compensates for the risk in some way. That objective can be as highly variable as the other components – from being set too wide to too close while some will not even place a hard target. To ensure that you take profit to offset risk while still leaving the door open to a more meaningful trend or move; placing an initial target that is equal to risk will relieve a significant burden from your shoulders. Trailing the stop on the remaining position will secure some profit and you will see an immediate improvement in your flexibility with the second half.
2. Use Time and Capital Wisely
If you are expecting to make a quick trade that is expected to only net 40 pips; would it make sense to still be in the same position for three days? Certainly not. There should be an expectation of time that one spends in each trade depending on what are expected of the entry, objective, stops, impending event risk, and other factors. What many market participants forget is that each trade they take requires a portion of their margin. If your capital is tied up in a nonperforming trade while a great trading opportunity stgelops, then you have incurred what economists call an opportunity cost. This may seem harmless, but improper allocation of your capital can start adding up in missed trades. What’s more, the longer you sit in a shorter-term trade without it performing, the less likely you are to see a successful outcome from the trade.
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3. Better Control Your Stops
Most traders go through a phase in which they believe themselves capable of making all their trading decisions in a discretionary manner and on the fly. However, without clear rules for entry and exit, discretion often translates into emotion; and emotion is not conducive to successful trading. For those looking to increase their profit, one of the best things they can do is better control their losses. Profit is not a trade-to-trade concept. It is an overall condition for a trader over a period of time. Consider a strategy that closes successful trades for 400 pips in profit while the average loser is 100 pips. That would seem a good risk/reward until we learn that only 10 percent of the trades in this strategy are winners. The stop loss is the foundation for any risk management strategy and a good policy for placing emergency exits can turn a hemorrhage into a trickle or even a losing strategy into a profitable one.
4. Be (Somewhat) Flexible with Position Size
It is important to limit the risk you are willing to take on each trade. There are many instances in trading history where someone thought a setup was perfect and would put their entire account behind a position only to have it blow up in their face. Remaining humble to the fact that every trade is based on some level of probability (often times a worse probability than the one placing the trade is willing to admit) encourages better trading habits. Consequently, it is my rule of thumb not to risk any more than 1 to 2 percent of my account on any single trade. However, there are times when so many elements line up for a setup (such as the potential for a long-term trend to stgelop) that a higher probability for success and larger payout require greater exposure. Increasing the size of a position to a moderately more risky 5 percent sometimes is appropriate to book the best trade for the month, year or perhaps lifetime.
5. Align Your Trades to Larger Trends
Which seems a better scenario: taking a long position on a bullish breakout that contradicts the higher time frame trend or taking a long position on a bullish breakout that aligns itself to the higher time frame trend? The answer should be clear. Establishing a trade that coincides with a larger trend boosts the likelihood of a positive outcome and it can significantly increase the potential return that can be reasonably expected from a position. Consider, if you take a position that counters the higher time-frame trend, the move will is a correction that will be under constant pressure to return to the underlying bias. In trading, where each trade taken has a probability of success, everything should be done to improve the potential outcome.
By John Kicklighter, Strategist at DailyFX.com
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