By Shawn Cannon From FX Trading Network
Breaking Even: How to Preserve Your Bankroll
Price does not care about you. Nor does price care which direction you want it to go. Price does not even care where it once was. So if price is running away from you, do not just let it get away with bankroll. Put a stop to it. More importantly, when the market has rewarded you with pips, take them before price turns and takes it all back. Protecting your bankroll is the number one priority in trading. It is more important than the trading method itself.
When you first begin to trade, you must learn to love to break even. It is a common mistake for beginning traders to get into a trade, watch price move against them, and then just wait it out until price returns back. This is especially important if you were in a trade that was at one point profitable and then price spun around and put you at a loss.
I recall talking to one trader who the day before had a current trade sitting at 100 pips. That evening when I spoke with him and inquired about the trade, he told me it had closed out for 200-pip loss. 200 pips! He at one point had the potential to close out the trade at 100 pips. I asked him why he would have such a large stop loss. He told me it was because he sees how prices moves and he wanted to be sure price had time to move around before heading back up into profit. So naturally I inquired one what his profit target was. He told me he didn’t have a profit target. How could he know when to exit if he did not have a profit target in mind?
This was clearly one trader who was doomed to blow his account. He had no regards at all to preserving his bankroll. Now there’s nothing wrong with having a 200 pip stop, provided that you’re take profit is a minimum of 200 pips and that you are able to hit your profit target over fifty percent of the time.
Surely, there should have been a point where he should have moved his stop loss to break even. New traders shy away from moving their stop to break even as they feel that if price hits their stop then they just spent all that time and energy for nothing. That is the farthest thing from the truth. By moving your stop, you are preserving your bankroll. If you have no bankroll, how can you trade? It should be the number one priority to ensure you against losing money.
A natural question one asks is when should they move their stop to break even. Unfortunately there’s no one right answer for that. For the new trader, I would say as soon as possible. Once you trade is 20 pips in profit, it is probably a good time to move your stop to even. It’s okay if price moves back down and takes out that stop. Know why? If your set up is solid, you can always re-enter the trade. And if it turns out your set up was not that great, you were able to spare your bankroll a loss.
When you are in a trade, the priority should be to first move your stop to break even. Then from there, it should be to start taking profits. A loss, while it will happen, should not happen more often than the times you break even. And most importantly, you should at least take profit the same amount of times or more than when you break even.
The FX Trading Network has recommended brokers that allow you to set up a trailing stop loss. After moving your stop to break even, a trailing stop is a sure fire way to guarantee you profit.
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