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​Trade Management: How to Set Stop Loss and Profit Targets

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How traders set profit targets and protect capital with a stop lossTrade management is an essential part of doing business in successful active trading. If proper risk management is not executed, a profitable trader can end their career within one or two bad trades. It is important to understand and accept the fact that losing trades are a very common part of trading and should be viewed as nothing more than the cost of doing business.
The biggest reason a trader will not make it as a professional trader is because he or she personalizes a trade that is not making money, turning a losing trade of what could have been a reasonable small loss (if proper trade management was executed) into a career ending disaster.
Successful traders often say, “Plan the trade, trade the plan.” Setting a stop-loss and profit target prior to executing a trade allows traders to measure the proper risk/reward scenario. To further explain, a stop-loss is an order to exit a trade once a trade failed or is no longer valid. It is a dollar amount you must accept before you place the trade.  At this point, you have accepted the risk and the fact that there may be a loss on the trade.

​Three basic stop-loss strategies include:

Initial Stop Loss: Risk point as defined by your original entry.
  • Break-even Stop Loss: When a position moves in your favor, you move the stop loss point from the original spot to your break-even area.
  • Trailing Stop Loss (profit taking): Used to protect profits on a winning position.
A trader must execute this factor flawlessly as proper management of your losing trades will dictate what you take home every month, not how much you make on winning trades. What this translates to is that when it comes time to execute a stop loss, you must do it without emotion because you understand it is a part of doing business.
The most common reason traders blow up their accounts are too much leverage relative to their skills and not truly accepting the risk.
Setting profit targets is also important as it is the overall plan to maximize risk vs. reward in a trade. Without having a target set, you run the risk of letting a winning trade turn into a loser. The skill of booking profits is one of the hardest to teach for the reason that it can be more subjective than setting a stop-loss.

A few profit taking scenarios include:

Exiting at a clearly defined support or resistance area on a chart, such as a previous high or low.
  1. Scale out of a good trade, if you still like it, you can always get back in.
  2. Exit into momentum moves looking at exhaustion candlesticks and volume.
The bottom line is that a trader should always know when they plan to enter and exit a trade prior to executing.
By using stop losses effectively and setting profit targets, a trader can minimize losses and maximize profits.
U.S. Government Required Disclaimer - Commodity Futures Trading Commission. Futures, options and stock trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures, options or stock markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures, options or stocks. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. 

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY, SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.