Why do you need to stop loss and take profit on forex? And are they needed at all?
This article is about how you want to move take profit closer and move stop loss away. And also about how to stop doing this without much effort.
Let me guess: you are no longer new to trading. You may have tried a number of trading strategies that “did not suit you.” In this case, you probably feel that you put a stop loss and take profit “somehow wrong” or “somewhere not there”.
And if you have been trading for about a year, then most likely you have managed to read about stop loss and take profit in trading books during this time and look at this topic on the Internet. In this case, you are probably grinning right now, waiting for another boring article about “stops for high / low, and takes – at least 2/1 of the size of the stop …” But still, somewhere deep down there is hope that the author will be able to “Surprise” with something not so “beaten up” and more justified or something…
I must say right away that I understand all these sensations. And therefore I hope you do not disappoint.
So let’s get started.
1) Stop loss and take profit. Why are they furious?
In most trading materials, stop loss is positioned as “limiting your losses”. And everyone reads this and nods with the understanding that “yes, to limit losses is good, I agree, I understand everything, this is a good idea” … But in practice no one then limits them. Because why, if you can wait, “and suddenly turn around.” Yes, and “I’m not a coward and I’m not afraid of any losses – no, I’m brave on the contrary, I can sit out at what loss”. Or “what if I limit, and the price immediately turns around ..?” Yes? 🙂 In general, all the circumstances are against setting a stop loss.
Take profit, in turn, is positioned as generally, figs understand that. “Profit-taking”. And why fix it, if it can be more? They suggest putting it “in the initial stages 2/1 or 3/1 there compared to the stop loss value”. And all again, “yes, yes, for a start it’s not bad, I agree, while I will put it this way, and then we’ll see …” And few people admit to themselves that it’s not clear what the relation is from? Why so? And so the trader reads it, then he has a couple of times the price does not reach the take, and he/she asks herself “why should I put such a take? Maybe I’m doing something wrong because the price doesn’t reach it? ”Or vice versa – the take worked a couple of times, and the price flew further“ in the right direction ”, and the trader sits and bites his elbows:“ well, why did you fix it, you still had to hold it I knew … ”
As a result, “I’d better wait for” + “why take it exactly” = dos videos my risk management. Sooner or later, the trader will still slide into non-compliance with all these ALIEN obscure rules.
“But what is the way out then?” The way out is in the correct understanding of the essence of trading in general and the essence of stop loss and take profit in particular.
The thing is that the messages about “limiting losses” and “profit-taking” are initially wrong, and therefore the reaction from the side of the trader is corresponding to them.
2. Why do we need to stop loss and make a profit?
“Oh, well, I see why they are needed…” But no. In fact, few people understand this.
The difficulty is that at the initial stage, the trader does not understand the essence of trading. It seems to him that we need to somehow learn to understand where the price will go. As soon as this thought arises, the market begins to be perceived as an enemy.
The trader believes that the market SHOWS him where he is GOING to go, and then he types deceive and go the wrong way. As a result of this, the trader has a desire “not to let yourself be deceived”.
If the goal is not to let yourself be deceived, then the triggered stop loss is like a market victory over a trader. And if the price then unfolds, then the trader, it turns out, he actively participated in deceiving himself 🙂 The same is with taking a profit – if it worked, and the price flies further, it is perceived as a hint at the trader’s stupidity and cowardice. Like “scared to hold on longer.” And it is also perceived as a defeat from the market, which “did not allow to earn more on itself”.
Now let’s imagine that we are no longer trying to get “hints from the market” about where it is going to go. Those. we look at the chart and think: “Although I see trends / flat / patterns here, I still don’t know where the price will go, and the figs would be with it.” In fact, we cannot know this (reasons in detail described in my other articles, I will not repeat). So, in this case, we cease to believe that the market owes us something (like “if the highs rise, then it supposedly SHOULD go up). We no longer think that since he drew such and such a picture, then he likes MUST go there and there. Which means he cannot hurt us without meeting our expectations.
Thus, we allow not 1, but 2 scenarios:
Fearfully? 🙂 I agree. But what does stop loss and take profit to have to do with it? And then how to make a profit?
Moving on to the good news. Despite the impossibility of guessing where the price will go, each trader can look at the chart and see that he does not shine with the “variety of forms”. Simply put,
The price has been painting about the same for decades.
We are talking about all kinds of “price figures” or, as they are also called, patterns. The price unfolds in an absolutely monotonous way, by the same figures. And the movement continues after the stop is also pretty monotonous. All the same patterns / patterns every day / week / month / year.
- We do not know where and how much the price will go in a second/minute/hour/day, etc .;
- But we see with our own eyes that the price draws ONE AND THE SAME PATTERNS from the day markets were born;
After that, the essence of trading becomes obvious:
You just need to find a pattern (some kind of price pattern), which is REPEATED CONSTANTLY and bet on the fact that it will form again.
Think it over. Patterns do NOT stop appearing on the chart for about a hundred years. They appeared there for 100 years without changes, regardless of wars, financial disasters, “bull markets” and other global things. And continue to appear to this day, THE SAME. And during the same hundred years, the price as it was, remains unpredictable at any given time.
But, naturally, the “problem” is that:
While the pattern is not yet fully formed, it cannot be said in advance whether it will be formed or not.
We will analyze this using the example of a reversal pattern (honestly, I don’t know what it is called), which has always been, is and will appear on the price chart. Just because the price again does not shine with a variety of reversal patterns.
When a novice trader sees this, he thinks that he “found a bad pattern again”. Because he thinks that he will be able to find one that will have only 1, a “good” scenario. This is normal. Part of the way, so to speak. But, let’s say, the trader reconciled and realized that any pattern would either form “as it should” or it would form “not as it should.”
In this case, when the chart BEGINS to draw something similar to our pattern, the trader simply puts on the fact that it will form completely, ALLOWING that the pattern may not form “as it should”.
In this case, the approach is fundamentally different from the “guessing game” – we give the market the freedom to do whatever it wants. He simply cannot go “in an unexpected direction,” because he can either form a pattern or not form. As a result, we know in advance what to expect, and the market cannot surprise us.
After all, it seems that after the formation of the pattern, “the trend has changed and the price will go in…” 🙂 Oh, we decided that we did not know how to predict the future.
In general, after the pattern there will be the same uncertainty – the price will either continue to move further or go in the opposite direction.
In short, we have an eternal pattern that (repeating again will not be superfluous) will either form or not. And at any moment in the formation of this pattern, the trader does not know this in advance, so you need to calculate both options. Also in advance, of course 🙂
If at any moment both a positive and a negative scenario are possible, then you need to enter the market in such a way that:
- in a “positive scenario” get enough profit,
- with “negative” – do not get a big loss.
With this approach, the trader will close trades with a small loss when the expected scenario will “fail”. And close deals with profit when the scenario occurred “as expected”.
But wait …