Stop loss plays a very important role in risk and money management in trading. On the road to profitability, let’s start by agreeing that we need stop loss exits. In other words are you taking the market conditions into account and willing to give your trade a breathing space so that you don’t get whipsawed or repeatedly get stopped out. Trading cost is an important factor in your trading that many traders tend to ignore. Most take it as the inevitable cost of doing business. Just don’t forget, the more trades you place, more commissions or spreads you will have to pay and the higher your trading cost will be. After this agreement on having stop loss exits, we need to determine how to effectively select stop loss exits to avoid excessive stop outs.
When you talk of your trading system, you should think about its win ratio and the payoff ratio. You should want to improve on them. The best way to do this is to develop a stop loss strategy that takes into account currency market conditions. So right there you can increase your profitability if you increase the number of winning trades that is your win ratio thereby decreasing your trading cost. A trading system is like having a girl friend. You can only have one girl friend at one time. There need to be a connection between you and your trading system. It truly is like having a personal relationship. Finding the right trading system can be a lengthy process. You must believe in your trading system and have a high degree of trust that it can produce consistent level of profits overtime.
You need to thoroughly test your trading system and try to measure and calculate its parameters accurately. If you have a trading system that isn’t working for you and your win ratio and your payoff ratio don’t generate a profit over time then you need to rethink your trading strategy. But you must also understand that no trading system can be perfect and no trading system can produce 100% winning trades. When you lose a trade, it can be your trading system or it can be you yourself. Determine if it is your trading system that isn’t working or is it your trading psychology that is off. Make adjustments to entry and exits. Maybe the market conditions have changed and you haven’t adjusted your trading system to the new market conditions.
Test your trading system overtime. Make a number of trades with your trading system. Just keep this in mind that if you don’t give your trading system a chance to work jumping constantly from one trading system to another trading system in search of a holy grail won’t help you. Divorce is never a good idea. But if the things don’t work out there is no recourse except taking a divorce. Divorce of any kind can be emotionally and financially expensive so proceed with caution when divorcing your trading system. The decision to divorce your trading system should be a carefully thought out one.
You ultimately will also be profitable if you feel comfortable and confident with your trading system. The primary purpose of your trading system is to make you feel comfortable and confident. In the end, you need to develop a relationship with your trading system. You will feel confident when your trading system has proven to you and you have proven to your trading system that both can work together. It’s a team work.