How do I learn to maximize my profits and minimize my losses?
There are certain facts have remained steadfast over the years with regards to trading. Experienced and successful traders will point out that, despite being able to get their high probability set ups ‘right’, in order to enter the market at the precise point when their set up signals, they’ll never and have never got their exits just right.
Getting the exits ‘right’ is one of the most challenging aspects of our trading and it comes as quite a shock to new traders that our exits will never always be spot on and that we simply have to execute them as part of our trading plan without any hesitation and without fear or recriminations that we’ve left more pips and points on the table. We may be able to achieve excellence, but perfection (where trading is concerned) is an impossible ambition.
Therefore maximizing our profits and minimizing our losses can only be achieved within the parameters of our trading plan. We’re never going to be in a position to accurately predict, with any form of certainty, the top and the bottom of any market move, but what we can do is devise a strategy that will allow us to take a sizable proportion of the market move in terms of pips or points. Rather than learning to maximizing our profits and minimizing our losses we must learn to accept our limitations and work within them. So how do we set our parameters?
Plan the trades and trade the plan
Fortunately, if we have the self-discipline to adhere to a trading strategy and trading plan that we have faith in, then our scope for taking our profits and limiting our losses should be set by the stop loss and take profit limit orders that we set upon entering the market, although these two parameters can be adjusted as the trade progresses in our favour. In setting the parameters of a stop loss and a take profit limit order the anxiousness and responsibility of picking the top and bottom of any market move are removed from us as we in effect defer to the strategy.
Trailing our stop loss to minimize our losses
One method for minimizing our potential losses is to ‘trail’ our stop, or to move it perhaps by following the readings of an indicator such as the PSAR. In this way we lock in our profits as the trade moves in our favour and we reduce the potential impact a sudden reversal has on our trades’ success and profitability.
Trailing stop losses are available on many (most) trading platforms and are one of the most under rated and under used tools available on our platforms and as such will enable traders to minimize our losses. Trailing stops are also relatively easy to ‘code’ into expert advisors that we may prefer to use on, for example, the MetaTrader 4 platform.
Control our risk and we have an edge
Far too many traders, in particular novice traders, imagine that their edge comes from their HPSU (high probability set up) occurring. The reality is that the edge to an overall strategy is derived from the risk control and money management technique we exercise and not the method aspect of our trading. Also and although it’s a somewhat loose trading statement that has become an internet meme; “looking after the downside and the upside takes care of itself” is in fact a statement that has, at its core, a strong element of truth and validity when put into practice into the market.
Maximizing our profits as part of our trading strategy
As we alluded to earlier there is no method that will allow us, with any degree of certainty or regularity, to perfectly pick the bottom and top of a market move, whether we are day trading, swing trading, or position trading it is quite simply an impossible task. Therefore when we devise our trading method and install it as part of our 3Ms into our trading plan we have to either use indicators to encourage us to close the trade, or use some form of candlestick pattern recognition such as is commonly revered to as “price action”. However, whichever we choose, price action base exits, or indicator based exits, none will ever have 100% reliability.
As an indicator based reason to close we could use the PSAR reversing direction to appear the opposite side of price. Alternatively we could use an indicator such as the stochastic or the RSI entering overbought or oversold conditions. Or we could look for an indicator such as the MACD or DMI to make lower highs or higher lows on the histogram visual, signalling a potential reversal in sentiment.
Moving on with the subject of higher lows or lower highs brings us neatly to price action. In order to maximize our profits, by exiting at what we hope will be the right time when measured over a significant sample of our trades, we need to look for clues as to a potential reversal of sentiment. For swing traders using price action this could be represented by price failing to make new highs, forming double tops and double bottoms on daily charts, or the classic emergence of doji candles, which indicates that market sentiment may have changed. Whilst not 100% reliable these time tested methods of calling a market reversal, or a stop to the current momentum, can be used highly effectively to prompt us to exit our trades and hopefully maximize the available profit.
Naturally there are instances when we’ll exit the market, believing that we’ve taken the most pips of points from the market move that we possibly can, to then watch on helplessly as price firstly retraces to then continue its previous direction. However, that is one of the perils and penalties we’ll pay because, as we suggested at the start, no matter how long and successful a career we have in this industry we will never manage to get our exits right, we’ll never be perfect but what we we can do is practice excellence.
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