What should be the ideal take profit level in currency trading?
Description: Are you still confused about where to place your take profit levels in currency trading? This article clears up the confusion.
Many forex traders can easily work out where to place their stop loss orders but determining where to place their take profit orders is not as easy. This is due to the fact that no trader wants to “leave money on the table”. Everyone wants to glean the last pip from every move that occurs. Unfortunately, people who tackle currency trading in this manner end up getting punished for it. They end up seeing profitable trades turn to losers and this throws them into another bout of twisting and chopping their strategy.
It would have been nice to have one general rule for where a take profit level should be placed for each trade taken in currency trading but this is simply not possible. The only way to handle this is to make traders understand the fact that one cannot get all the money available on a particular move so money must still be left on the table. Once this is understood it becomes easier to place take profit levels.
What are the best ways to place take profit levels in currency trading?
- Risk to reward ratio
This is one of the best ways to handle placement of take profit levels in trading. With the risk to reward ratio, the traders concern is making at least double of his risked amount for every winning trade and if this is maintained over time, the trader will become a consistently profitable trader. The best risk to reward ratio to use is 1:2. In this way, the trader can still have 50% losing trades and still turn decent profit at the end of a trading month.
- Use of support and resistance levels
This is another good way of placing your take profit levels. In a bullish trade, simply place your take profit level at the next resistance level and if in a bearish trade, place it at the next support level. Now if the level does not at least equate to 1:1 in risk to reward ratio, place the take profit at the next support or resistance after that one. However, you need to watch out for market reaction at the first level. If it doesn’t break it decisively, move your stop loss to break even and watch how the trade plays out. This is so you don’t lose anything if that first resistance or support level holds.
- Allowing the trade to run
This method involves not having a predetermined take profit level but rather moving your stop loss level as soon as you are up 1:1 on risk to reward ratio and allowing the trade to run until you get an opposite signal. This method is one that is used extensively by many traders but it demands a great deal of patience and discipline as you may not see any decent profit unless the market goes on an extended run at least twice in the trading month. You equally need the discipline required to allow a trade to continue running after seeing it go 200pips in your favour and come back to 70pips. The natural reaction would be to close the trade and take the 70pips but in many cases, the market goes on to move back in your favour!