Letting your profits run, maximising your profits and knowing your risk are the top three reasons why mastering your stop loss strategies are so critical to your success as a trader.
Your goal as a trader
Your goal as a trader is to let your profits run and to cut your losses off short. At least that is the age-old mantra we have all heard over the years. However, there is a key aspect you might not have heard people talk about, which will help you nail this skillset.
Measuring your profits in terms of your initial or average risk
The first thing you need to do is measure your profits in terms of risk. This will be nothing new to many of you, as Dr Van Tharp popularised this idea in his book ‘Trade Your Way to Financial Freedom’.
For those who haven’t heard of this concept, it is very simple.
On each trade, we will risk a certain amount of money. For this example, we are going to risk $500 as our initial risk on the trade. This may mean we have a $50,000 portfolio and we are willing to risk 1% of our capital on every trade we take.
This $500 in risk capital is now what we call 1R or 1 lot of risk.
This allows us to measure our profitable trades regarding R or risk.
If we made a $1,000 profit, we would call this a 2R win.
If we made a $2,000 profit, we would call it a 4R win or 4 lots of $500.
Why is it important to measure your profit in terms of risk?
Measuring our profitable trades in terms of R is critical, as it allows us to maximise our profitable trades. With confidence, we can start to pyramid into trades and truly maximise our winning trades.
However, we can also add to our winning trades in a systematic way.
Ashley Jessen is the author of CFDs Made Simple and CEO & Co-Founder of ProfileBooster.com.au, a company dedicated to helping finance and professional services companies drive more leads, convert more sales and boost the authority through intelligent PR, content and media distribution.
