Split Entries, Stop Losses, and Take Profit Placement

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Stop LossKnowing when to enter a trade is important: in fact, it is very important! Don’t believe those pundits who say you can make money with random entries. While that is theoretically possible, it is very unlikely. Having a good method to pick entries is extremely important. Yet there are other issues to consider when entering trades that are almost as important, but which get far less attention.

Firstly, when you enter a trade, should you enter it all at once, as most traders do? It may be a better idea to enter two-thirds of your fill size, and then only add the remaining third if the trade moves in your favor relatively quickly. This is because the very best trades tend to move into profit right away, while the very worst trades tend to move into loss right away. So, if you do this, you will be a little lighter on the losses and a little heavier on the winners – on average. You can achieve a similar effect by exiting from part of your position if the trade moves strongly into loss right away, too, as this would leave you lighter on the losers. Your second position, the addition to the trade, should always be smaller than the initial entry.

Secondly, if you are going to add to a winning trade – or to be more accurate, a trade that is behaving as a winner because it has moves into profit quickly – it is important to not increase your total risk, by making sure that you tighten the stop loss on the initial part. This can be a little confusing, so let’s look at an example. Say you enter a 2-lot trade with a 50 pip stop loss. The trade goes in your favor by 50 pips and you add another 1 lot which also has a stop loss of 50 pips. This means that you should tighten (move up) the stop loss on the first 2 lots by 25 pips so your total risk remains the same. The important point is to make sure that you never increase the total risk on the trade when you put the second part on.

Thirdly, while it is possible to use a fixed profit target when you enter a trade, you should always be prepared to be flexible with it depending upon what happens with the trade after you enter it. It can be a better idea not to have any set take profit at all. This is because you just don’t know how the trades will develop. For example, suppose you use stop losses of 50 pips and set take profits of 150 pips. What if you have five trades in a row which reach 149 pips of profit and then turn around to hit the stop loss? Are you just going to give up all that floating profit? You will get much better results by being prepared to react to what the market does.

Finally, using stop losses and take profits which are relatively large can work very well, if you are prepared to exit trades before either one is hit. This is because a big stop loss will allow a trade room to breathe while protecting you from a catastrophic loss. A big take profit target is likely to be triggered in the event of a sudden price spike, which will probably fall back just as suddenly.

These trading tips are truly worth thinking about, because applying them correctly will make your trading more profitable.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.